Big, future dollar amounts are hard to visualize realistically, says Troy Hirschi, vice president of financial planning for SunGard’s wealth and retirement administration business. “Most people grasp that you live on monthly income now,” he says. One problem with the focus on accumulated assets is that people get excited when they see a big number. But if they’ve saved $500,000, he points out, then the true question is, what is that amount going to do for them? Income projections using a sustainable drawdown give people a realistic view of what their assets can provide in retirement.
How to calculate a sustainable drawdown rate is the reason SunGard created its financial planning tool MyRetirement, Hirschi tells PLANADVISER, and the firm positions it as a retirement readiness tool. (See “SunGard Unveils a Tool for Safe Spending.”)
“Our focal point is on the sustainable amount the plan participant can expect to receive from assets” in retirement, Hirschi says. The tool can illustrate the sustainable withdrawal number as either a percentage rate of total assets or as a monthly dollar amount. A side-by-side comparison contrasts the amount in current dollar terms with the individual’s current take-home pay, which shows deductions for taxes and retirement plan contributions.
“Most people don’t get that 4% withdrawal rate,” Hirschi says. SunGard finds the people better comprehend draw-down figures in current-dollar amounts, because that is how people think of their finances. The usual 4% rate people commonly think of is a mathematical concept that’s been around for a long time. “It was a concept a professor put together, assuming a very conservative portfolio of stocks and bonds,” he says.
Seeing a projection allows plan participants to bridge a potential gap in future finances, Hirschi says. If someone has accumulated $100,000 in their account, it will equal a specific amount of monthly income in retirement. Showing the future amount is not enough, he contends. Any drawdown calculator or strategy should include ways for participants to take action quickly. If they save more each month, they should be able to see immediately, perhaps with sliders on a screen, how this action can improve their situation. Plan sponsors should make it easy and convenient to change their deferral.
Making it Last
The financial crisis in 2008 and 2009 led SunGard to create a retirement readiness tool that would look at sustainable withdrawal rates for portfolios, according to Hirschi. A dependable withdrawal rate could mean helping an individual feel he would not have to stock a portfolio with fixed-income securities or purchase an annuity to achieve sustainable income, he says.
SunGard’s tool looks at the assets of an individual or a household—Hirschi explains that it can be used to calculate a drawdown formula for a couple as well as a single person—the year of retirement, and what they want to assume for the length of retirement. To put it bluntly, Hirschi explains, this means life expectancy, which can be difficult though not impossible to determine.
SunGard has data defaults in its tools, but people can customize the information using knowledge about the life spans of family members. Calculating for inflation is necessary so that an individual’s purchasing power stays constant and is not eroded by inflation, Hirschi says. SunGard uses an inflation rate of 3%.
An accurate drawdown formula must also factor in risk tolerance (i.e., conservative, moderate or aggressive) when selecting a model portfolio. The model portfolio’s standard deviation and expected return are used in a Monte Carlo analysis to derive sustainable withdrawal rates, Hirschi says.
It may sound complicated, but the participant does not see what’s working underneath the hood, Hirschi says. They input some figures, using pre-set defaults, if they prefer, and the tool tells them they can likely expect to spend about $1,200 each month with a 50% confidence level that the money will last throughout retirement.
Many of SunGard’s requests come down to holding the hand of the plan participant and telling them what steps to take next, Hirschi says. The firm is now considering tools that show the effect of doing a risk capacity analysis on investments—investing more wisely—can improve the dollar amount someone can count on in retirement.
Making these concepts easy for people to understand is the key, Hirschi says. “Apples to apples, and no confusion,” he says. “That’s more than half the battle won, when they understand.”