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c. Example: Chuck and Sarah divide their retirement portfolio into three “buckets.”The first bucket will be used to provide their income from age 65–75. As you canimagine this bucket will be invested more conservatively than the other two partsof their retirement assets. The second bucket will be used to provide incomefrom 75–85 and can be invested with a moderate amount of aggressiveness(moderate risk/moderate return). The third bucket can be used to provide theneeded income from 85–95 and can be invested with the highest tolerable degreeof aggressiveness (higher risk/higher return).4. The essential-versus-discretionary approach (also known as flooring)a. The FPA defines the essential-versus-discretionary approach as follows:(1) Classify client’s retirement expenses as essential or discretionary. Low-riskinvestments or annuity guarantees are selected to fund the essentialexpenses. A mix of medium- and higher-risk investments is selected tofund the discretionary expenses. Income is drawn from the respectivepools to cover essential and discretionary expenses.b. About 33 percent of surveyed advisors frequently use or always use the so-calledflooring strategy.c. Example: Cliff and Claire have essential expenses such as food, rent, and utilitiesthat amount to $5,000 per month. Social Security will provide them with aninflation protected $3,000 a month. Cliff and Claire buy an annuity with a cost ofliving rider that provides an inflation-protected $2,000 a month to augment SocialSecurity in paying for mandatory expenses. They then draw down income fromthe remainder of their assets to pay for their discretionary expenses.5. Structured systematic withdrawal approach. Under this approach, planners: (Video: Whatare the three approaches advisors are using when counseling clients about retirementincome planning? Tacchino, Kitces, Guyton)a. Manage retirement assets as a total portfolio (not a segmented or age-bandedportfolio)b. Create guidelines for safe withdrawals from year to year. There are actuallyseveral schools of thought that are in use by practitioners here:(1) Take an initial withdrawal of the portfolio at retirement (e.g., 4 percentof $1,000,000, or $40,000 in the first year) and then adjust the $40,000each subsequent year for inflation regardless of the current value of theportfolio. In other words, the initial value is adjusted without “consulting”the current value of the portfolio on a year by year basis. This is themethod suggested in the initial and ground-breaking research on the topicthat using historical data would prove to be a fail-safe method for 30 yearseven if the market repeats its worst case 30-year pattern. Under thisapproach the payments are fixed year to year on an inflation-adjustedbasis. Planning can proceed accordingly for 30 years (or whatever thechosen time horizon) in a worst case scenario.(2) Take an initial withdrawal of the portfolio at retirement (e.g., 4 percent of$1,000,000, or $40,000 in the first year) and make that the “salary” eachyear for the client. There is no adjustment for inflation, nor is the year toyear value of the portfolio “consulted” with regard to future distributions.This is a variation from the traditional approach. Under this approach thepayments are fixed year to year on a nominal (non-inflation adjusted)basis. Planning must account for loss of purchasing power separately.6.3