Although clients may want you to perform endless calculations on whether they may run out of money before they run out of life, retirement planning should really be a much more textured exercise, suggests Lee Eisenberg in his book The Number: A completely different way to think about the rest of your life.

The “Number” in question is how much money clients are going to need to fund the various things, not just golf memberships, that will bring them satisfaction down the road. Eisenberg, a good storyteller with a sense of humour, explores how they can shape financial futures that will achieve what they value most and can afford.

So, he asks, if you had an unlimited amount of money, what would your ideal retirement look like? More importantly, if you were told you would live for exactly five more years in good health, how would you spend your time?

Life planners look beyond finances and ask instead about a client’s dreams for the future. They operate on a set of assumptions that go beyond traditional number crunching, suggesting instead that clients trudge through the muck of self-examination and build a comprehensive plan that will guide them through an emotionally and materially secure retirement.

Most people are in denial when it comes to serious retirement thinking, Eisenberg maintains, referring to this group as “The Lost Years Club.” Their denial stems from two fears: First, that the amount of money they’ll need at retirement is simply more than they’ll ever be able to accumulate no matter what they do. And second, that they will be forced to make hard choices about their current lifestyle, sacrificing something now for more flexibility down the road.

Life planning aside, clients still want to know what their Number is and need help figuring it out. The most popular variation usually settles on 70%-75% of pre-retirement income. This assumes that taxes will drop, that there will be less need to save, and that work-related expenses will also be reduced.

However, rising health care costs and higher spending on travel and entertainment, especially in the first years of retirement, often mean that clients need more up front and less down the road. Draw too little and they may needlessly lower their standard of living; draw too much and they will run the risk of burning through their capital too quickly.

Typically, that initial withdrawal rate takes into account the projected length of retirement, the portfolio’s allocation, and the fluctuation of markets and inflation. The draw down, for example, might be 4% of the portfolio’s value at the time retirement starts. The income is adjusted upward for inflation each year, but the amount doesn’t change in real dollars.

Some researchers have developed guidelines to boost that initial withdrawal rate as long as clients are prepared to make adjustments in later years when returns or inflation do not work out as planned. But this approach is actually a bit backwards as retirees are forced to fit their lifestyles to the resulting withdrawal stream, suggests New Jersey-based analyst William J. Klinger in his study, “Using Decision Rules to Create Retirement Withdrawal Profiles.”

The preferred approach would be for retirees to specify their desired retirement withdrawal profiles, choose a success rate they’re prepared to live with, and have annual retirement rates defined to produce each profile, he maintains.

Klinger defines three primary retirement profiles. Under the uniform profile, the retiree makes steady withdrawal amounts in real dollars throughout retirement. Someone looking to spend more money early in retirement and less in later years would choose an aggressive profile. A retiree wanting to increase withdrawal amounts in real dollars over the course of retirement would choose a progressive profile.

Looking at a 40-year retirement period for a $1-million portfolio, an initial conservative withdrawal rate might be 2.5%, or $25,000, Klinger says. If this seems too low, clients might then apply “decision” rules that allow them to boost that initial withdrawal rate without jeopardizing the expected success rate.

For example, the retiree with a progressive profile might not increase the annual amount if the portfolio lost money the previous year. Or a uniform profile might actually boost the amount in real dollars if inflation is low and the portfolio performs really well. The withdrawal rate may thus be frozen, reduced or raised, depending on the portfolio performance.

@page_break@Targeting a 99% success rate, Klinger calculates the maximum withdrawal rate for the sample retiree’s portfolio under each of the three retirement profiles. He finds the initial withdrawal rate for the uniform profile is 5.5%, which normally would be viewed as the “one size fits all” rate.

But under the aggressive profile, the retiree could withdraw at an initial 6.3% rate, while withdrawing only 4.8% for the progressive profile. IE