Investments

Predicting the Future of Your Retirement

By Chris Duderstadt

October 12, 2021

Predicting the Future of Your Retirement


Key Points – Predicting the Future of Your Retirement

  • The Differences Between Uncertainties in Your Career and Retirement
  • The Visibility Provided by Financial Planning
  • How the Past Impacts Predicting the Future of Your Retirement
  • The Crucial Combo of Inflation and Taxes
  • In Sickness and Health, Can You Maintain Wealth?
  • 8 minute read

Retirement Can Be a Fun Flight If Turbulence Is Accounted For

When preparing for your dream vacation, it might be worth hiring a travel guide to ensure that your trip is everything you imagined it would be. That travel guide will hopefully do their best to go through the list of things you want to do, but there is more that goes into planning the vacation than the vacation itself.

Comprehensive financial planning is crucial when it comes to budgeting for large expenses such as a dream vacation and predicting the future of your retirement. The planning required for that dream vacation and your retirement also go hand in hand.

Prior to boarding the plane for that trip of a lifetime, put a retirement plan together that not only accounts for a dream vacation, but vitally importantly financial aspects like inflation, taxes, medical costs, bear markets, and more.

In this instance, Barber Financial Group CEO and Founder Dean Barber wants you to think of yourself as the pilot taking you to your dream destination. He encourages you to stress test your retirement plan for all those financial factors prior to takeoff.

“A pilot may have flown for thousands and thousands of hours, but they still go through a pre-flight checklist every time they get in the cockpit. They also have a checklist for if anything goes wrong during the flight,” Barber said. “They know exactly what the reaction needs to be so they’re not saying, ‘Oh my gosh! This is happening now. What do I do?’ If you stress test the plan and do it right, you’re going to know what action you need to take well ahead of time so you don’t make an emotional decision.”

Uncertainties in Your Career

Oftentimes, the plans for that dream vacation start formulating long before retirement. However, whether it’s during the flight to your dream vacation, your career, or in retirement, it’s pretty much inevitable that you’re going to encounter some turbulence along the way. Let’s start with some of those uncertainties in your career so we can get an even better perspective of the uncertainties of retirement. Here are five common questions that Dean says that pre-retirees should account for throughout the retirement planning process.

  • When are you going to get your next raise?
  • How much is that raise is going to be?
  • How much job security do you have?
  • Are you going to be forced to retire early?
  • Is there a chance you could receive a demotion?

“People often get a false sense of security during their careers and think it’s permanent. They don’t save nearly enough to prepare for some unknown event that might happen and then they get caught off guard,” Barber said. “Very few people get to retire on their own terms. Far more retirees retire due to an illness of their own, an illness of a loved one, or an involuntary separation from an employer.”

Uncertainties in Retirement

As Dean illustrated, predicting when you retire isn’t easy. Whenever one of his clients retires, he tells them not to have a false sense of security during retirement either. Predicting the future of your retirement isn’t any easier, but it can be done with a dynamic plan in place.

“People usually want to look at the old rule of thumb number of 4%. Let’s say they have $1 million,” Barber said. “They can draw $40,000 out of that. They’ve got their Social Security and maybe some rental income or whatever on top of that. That’s their income.”

But that’s just brushing the surface to effectively predict the future of your retirement. If you do it right, you can start projecting years into the future and see when things could go wrong. You can start to adjust beforehand to cut back on certain things. Or maybe it’s a good adjustment, where you can say things have gone better than expected. You can be free to spend or give more.

The Visibility Provided by Financial Planning

The crux of a good retirement plan starts with determining all sources of fixed income, such as Social Security, pensions, any royalties, and rent. Then, let’s look at your tax situation and understand how those different types of income are taxed differently. Finally, you look at the portfolio resources that you have.

“The idea is to design a portfolio that’s going to allow you to have the income that you want after taxes, with the least amount of risk possible to the portfolio. Then, stress test that plan and ask yourself what the right amount is to spend,” Dean said. “There is a right amount. We see all too often that some people are way underspending, but they don’t think they are. Other people are way overspending, and they think that everything’s going to be just fine. People very rarely have a plan that defines the amount they can spend.”

From a Monte Carlo Simulation to a Monte Carlo Vacation?

Barber Financial Group’s team of financial planners use the Monte Carlo simulation when they work with clients to determine the right amount they should be spending. Let’s say that a Monte Carlo simulation shows that a retirement plan has a 90% probability of success. That doesn’t necessarily mean it has a 10% chance of failure. It means the plan should work 90% of the time, and client should be able to count on the income that’s laid out in the plan without deviation. However, 10% of the time, there may be necessary adjustments to be made to the spending in the plan.

“Once we look at that Monte Carlo simulation, we can determine when adjustments need to be made. We constantly look three to five years ahead to stress test and see how things change,” Dean said. “If a client wants to take a vacation, I might check with them about putting it off another year or taking a lesser vacation if it’s putting too much stress on their overall plan. Sometimes it’s a discussion of tradeoffs. Knowing the chances you might have to adjust your spending during your retirement years is a big deal.”

Dean and his team have the goal to assess their client’s plan as often as they desire. Ideally, Barber likes to review that client’s plan with them at least twice to go over portfolio values and spending.

“If we have a conversation with a client at a moment’s notice, we can open their plan and all the portfolio values and the spending in the plan will be up to date,” Dean said. “If new tax laws have taken place, those are up to date in the plan.”

How the Past Impacts Predicting the Future of Your Retirement

As a part of their commitment to putting together comprehensive, forward-looking retirement plans, Jason Newcomer recently joined Dean to review 20-year rolling periods for the past 50 years. Their goal was to see how annually increasing withdrawal rates accommodated for a steady standard of living despite inflation.

The research they outlined in their piece, Retiring at Market Highs, is also pertinent for predicting the future of retirement.

“Anytime you have market valuations at historically high numbers, the next 10-year period for the market tends to be benign with mid-single digit returns,” Barber said. “When you couple that with historically low interest rates where you can’t get a lot of yield out of bonds, people need to take a different approach.”

So, what is the best approach to take? Dean suggests for people to look at their expenses and figure out how much to set aside in a very safe place so that interest rate and market fluctuations aren’t going to impact them.

“Typically, we want to go for about three years’ worth of income that we need our portfolio to produce and put that in a very safe account,” Dean said. “Then, we can take a piece and invest it like we were 10 years younger. We can handle some market fluctuations and invest to try to get some growth for that. When we have a good year, we sell off the winnings. We put them back into that short-term bucket where we always know we’ve got two to three years’ worth of income. When market fluctuations inevitably happen, people won’t be forced to sell at a low point in the portfolio.”

The Crucial Combo of Inflation and Taxes

Dean and Jason’s research also provided context about Why When You Retire Matters, which leads right into predicting the future of your retirement. Inflation and tax rates must be understood when you are preparing to retire and throughout your retirement.

“We call inflation the silent killer. Inflation does not cause people to go broke, but it will cause them to live like they’re broke,” Barber said. “The biggest mistake people make is looking at the last 10 to 20 years of inflation and pointing out that it’s only been 2% or 2.5%. They project that forward on all their expenses and that’s a huge mistake.”

As far as taxes go, the biggest mistake Dean sees is from people who do not understand that can’t control their taxes in retirement like they could during their working years. Social Security is taxed different than any other type of income. You must make sure that you’re planning for your required minimum distributions in the future. Dividends and capital gains are also taxed differently, and none of them play well together. Barber encourages people to determine how much money they need to live on after taxes.

“Look at all the resources you have and then determine year by year where you will pull that money from. That way whenever tax law changes happen, which seems like Congress is doing that about every other year right now, you can adjust how you’re going to withdraw,” Dean said. “It’s not a set-it-and-forget-it type of plan. You can’t just 4% across the whole portfolio. You need to be specific and deliberate about where you take your income from.”

In Sickness and in Health, Can You Maintain Wealth?

It’s always satisfying for Dean when a client has accounted for taxes and inflation so they are in a good financial position to take that dream vacation. However, there’s one more very important factor that he doesn’t want you to forget about as you are planning that special trip or for retirement in general. It’s imperative to expect the unexpected and budget accordingly when retirement planning. Health usually highlights the list of unexpected scenarios that retirees or pre-retirees run into.

“It happens all too often where someone makes a plan and then they or their spouse gets sick right before retirement,” Dean said. “Or maybe there’s a death a year or two after retirement, and everything changes. When we’re building those plans, we must take those things into consideration.”

With retirement plans for married couples, each spouse should be prepared to file an individual tax return if their spouse should pass away before them. With income at the same amount, their taxes will increase by approximately 30 to 35%.

“People need to consider the impact of higher taxes on the surviving spouse,” Dean said. “That’s one of the things that we put in the plan to make sure that we stress test for that.”

Predicting the Future of Your Retirement Begins and Ends with a Fluid Financial Plan

Before taking off on your dream vacation, there’s one more checklist you should complete in addition to your trip itinerary. Our Retirement Plan Checklist provides a timeline of items to be done prior to and during retirement.

“The rules about saving, investing, and taxes during your accumulation years turn on their head during retirement. Things don’t get simpler financially; they get more complex,” Barber said. “It’s critical for people to have a solid plan. We have a team of professionals—CPAs, CERTIFIED FINANCIAL PLANNER™ Professionals, risk management specialists, and estate planning attorneys—that work collectively on behalf of that individual, so that they are on top of it when things do change.”


Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.