section 1 - The American College Online Learning Center

markets have declined by a specified percentage. Fred and Ethel will lower the amountthey take down according to predetermined methods.LO 6-2-2: Describe what happens under the systematic withdrawalapproach if the client outlives the time horizon1. Systematic withdrawals are calculated over a specified time horizon. (Video: Whathappens if the client outlives the systematic withdrawal rate time horizon? Tacchino,Kitces, Guyton)a. 30 years is the industry standard that is typically used.b. If the client lives 30 years, and the worst-case scenario occurs, they will run outof assets.2. How can the problem be avoided?a. Do not just use 30 years in your practice.b. Discuss with the client how long the time horizon should last.(1) Use the amount of time with which the client is comfortable.(2) There should be a natural conclusion based on the client’s current age,family longevity, and health history.(3) The time horizon should become client specific.(a) Some 70-year old clients will insist on 30 years.(b) Some 60-year old clients will ask for 20 years.3. The withdrawal rate is recalculated to match the client’s time horizon. Safe withdrawalrates are built around worst-case scenarios that are not likely to occura. 96 percent of time all the principle is leftb. In the median result, we finish with 1.6 times the original result.c. In many circumstances there will be a cushion of growth.LO 6-2-3: Analyze how sustainable withdrawal rates apply to the middleclass1. What if the withdrawal rate does not sustain lifestyle? (Video: How do sustainablewithdrawal rates apply to the middle class? Tacchino, Kitces, Guyton)2. The tighter it is for the client, the more important it is to focus on the expense side—notthe income side.a. What expenses can be reduced without compromising the quality of life?b. Social Security plays a more important role for the middle class.(1) Delaying Social Security will become important for the middle class.c. Do not put the client in a scenario where they will run out of assets before theirdeath by suggesting systematic withdrawals that will allow a client to run out ofmoney.d. Do not ignore purchasing power (inflation) risk.e. Clients who do not have enough assets to retire should keep working and delayretirement if possible.f. Because of Social Security, lower-class clients with a modest portfolio may be ableto continue their standard of living in retirement. For example, Archie and Edithare lower middle income and about to retire. Archie will receive $1,500 per month($18,000 annually) from Social Security. Edith will get $750 ($9,000 annually). A6.13