Advisors providing retirement recommendations need to evaluate strategies and present options to clients. Communication is key and it can be a challenge to come up with the best way to compare alternatives. One way involves presenting metrics such as expected bequests and plan failure probabilities. However, it may be more helpful to use a graphical approach to show the year-by-year progression of funds available during retirement. I’ll demonstrate a graphical approach by comparing a variety of strategies.

This example will be based on a 65-year-old retired couple. They have accumulated $1.7 million of retirement savings allocated 50/50 stock/bond, and they also own an un-mortgaged house worth $500,000. They will receive a combined $42,500 in Social Security if they both claim at 65, and their essential expenses are $85,000 increasing with inflation each year. I’ll initially show results based on systematic withdrawals from investments and then successively bring in the following strategy enhancements:

Delaying Social Security;
Purchasing of a single-premium immediate annuity (SPIA);
Using a reverse mortgage;
Allocating more to stocks; and
Taking more aggressive withdrawals.

I’ll use a Monte Carlo approach to generate annual investment returns assuming arithmetic-average real returns for stocks of 5% with a 20% standard deviation, and 0.75% for bonds with a 7% standard deviation. I’ll simulate 5,000 retirements for each strategy and make mortality variable for the husband and wife. The life expectancies are age 90 for the wife and age 88 for the husband and the simulated ages at death will vary around these ages. The analysis is pre-tax and all results are shown in real 2018 dollars.

My interest in a visual approach to retirement planning goes back to a meeting a few years ago with British economist David Blake who was doing work on displaying retirement outcomes. Although he was personally comfortable evaluating retirement alternatives by applying economic-utility concepts, he recognized that these were foreign concepts to the general public and most advisors, so something more user-friendly was needed. I have been doing some recent work on the best metrics to use, and decided to see what could be done by including pictures instead of numbers.