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Here is your host, Mark Struthers. Welcome to the Healthy and Wealthy Retirement. My name is Mark Struthers. We're coming at you from Edina, Minnesota. We're usually filming in Edina or Chanhassen. And today we're talking about expenses. We've done a series of expenses-related videos, podcast channels, podcast episodes, to help you manage your expenses in retirement. There are five models that we generally use, and we usually show clients at least one or two of these.
One is a pure inflation adjustment, and that's usually what advisors use. They should not be using no inflation adjustment. But deflation adjustment is arguably the most conservative because it maintains your purchasing power of core expenses. We strip out healthcare. Healthcare is always a larger cost, especially later in retirement. But because your expenses usually decline, we often show them retirement smile or stages, which reflects that.
That spending is more initially, and then spending tapers off and declines except for healthcare later in retirement. That's the smile. So the inflation adjustment method is the most conservative. It's going to make your pensions usually less effective. It's also going to mean a higher dollar amount. We also show folks what is probably the reality of their spending. And then, you know, it's about you, the retiree, making the decision of which one you go.
We also use models of guardrails, which has to do with adjusting spending based on market conditions. A lot of folks don't like that. A lot of folks have a tough time wrapping their arms around it, and it does take a lot more year-to-year work. Guardrails is a good way of doing that. It's good not just from a portfolio longevity standpoint, but it's also good to maximize your initial withdrawals when you probably want to.
It allows for a higher withdrawal rate, but still statistically having that portfolio last. So we did that one. Today we're doing floor and ceiling. The last one. floor and ceiling is a way, it's simpler. It's a way of adjusting spending based on market conditions for portfolio longevity, but it's much less complicated than guardrails.
It generally doesn't allow for as big a withdrawal rates for folks if you're looking for rules by which you can take out more than, let's say, the 4% from the 4% rule. So what does it look like? Well, say like in this example, in a good market year, say the market was up 7%, so your $1 million portfolio went to $1,070,000. Your initial withdrawal rate at $30,000 increased to $36,000. So it caps the max amount that you can, the growth that you can take out at 20%.
So you participate in market upside up to 20% more than the initial withdrawal rate. And then during down markets years, like in this one, a 2% down market year, your $1,070,000 portfolio dropped to $1,049,000, we'll call it. And then your portfolio max withdrawal rate dropped down to, the decrease dropped down to $30,600.
So you can see where where this one would help with portfolio longevity as well, and it's easier to understand you know guardrails is based on initial versus current withdrawal rates, instead of just looking at the market from year to year and then having a max so this one you still participate in market upside it's simpler to to implement but it does give you increased portfolio longevity because you are decreasing spending during down years.
When I run these through these models through a Monte Carlo simulation, and what I usually find is the most money is withdrawn with guardrails. And for me, during the most important time initially in retirement, folks are going to want them more. But because there's not a lot of limits on it, the withdrawal rates often get quite large. When I compare the floor and ceiling to just inflation adjusted, and I did so here for the last, this was an example client.
I was a 40-something that came to us that was withdrawing about, currently withdrawing, the plan to withdraw roughly about $54,000 in today's dollars starting at age 60. It ended up being starting around $85,000. And you can see here with the pure inflation adjustment, that amount grows to roughly $193,000 to maintain the standard of living. The floor and ceiling is very close.
You can see here from year to year, there's smaller tweaks in the withdrawal amount, but it's very close to the inflation adjustment. And running this a lot of times, that's what you usually see because of the limits on how much increase or decrease there can be. So none of these are bad. And sometimes depending on the client, we might use one or the other. But my favorites are the retirement spending smile to show them what their spending is probably going to be like.
And then also guardrails because it does allow you to take out a higher amount. And because the market is usually going up over longer periods of time, it's why that one has such a larger withdrawal rate. It depends on the client, but usually that's where clients want it. Clients often want to say, I want to make sure I enjoy my 60s and 70s. I want to make sure my portfolio lasts.
And certainly floor and ceiling will help you there. But if you're kind of looking to maximize initial withdrawal rates and then still have portfolio longevity guardrails is probably best if you're looking for something to help with portfolio longevity but still allow some some market upside floor and ceiling is is not a bad way to go it's about making an informed decision because when you make an informed decision, that's what financial plan is all about and it helps increase the chances that
you're going to have a healthy a wealthier and a happy retirement don't forget to subscribe. Music.