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Here's the right way to explain Monte Carlo scores to clients · Root Ready

• 0:00
  SPEAKER_01: Welcome back to another episode of the Root Ready Podcast.
• 0:02
  SPEAKER_01: I'm your host, James, along with my co-host Eden.
• 0:04
  SPEAKER_01: And today we're going to be talking about one of the most misunderstood parts of financial planning, which is how do you properly interpret and explain a client's Monte Carlo score and do so in a way that's actually meaningful and helping to drive successful outcomes to their plan.
• 0:21
  SPEAKER_01: You were sharing one such example from a client you you used to work with at a prior firm.
• 0:26
  SPEAKER_01: Tell me more about that.
• 0:28
  SPEAKER_00: Yeah, I think there's a lot of ways that you can kind of put too much emphasis on the Monte Carlo score.
• 0:38
  SPEAKER_00: It's one of the first things typically that a client will see when you're going through a plan.
• 0:42
  SPEAKER_00: It's one of the earlier things that you share with them and show them.
• 0:45
  SPEAKER_00: And I think it's just a very easy number that can stick in their mind.
• 0:49
  SPEAKER_00: It's on that sliding scale that we're all familiar with since going to school.
• 0:54
  SPEAKER_00: 100% is good.
• 0:56
  SPEAKER_00: A plus below that is bad.
• 0:58
  SPEAKER_00: It's that's kind of the framework that I think a lot of it's natural as human beings, at least in our society and culture, to feel that way about it.
• 1:07
  SPEAKER_00: And it can be very easy to put too much emphasis on that.
• 1:12
  SPEAKER_00: And I think about a specific client at one of my prior firms I worked at where the Monte Carlo score was their lifeblood.
• 1:21
  SPEAKER_00: They lived and died by that score.
• 1:24
  SPEAKER_00: And we're constantly monitoring it.
• 1:27
  SPEAKER_00: And if it did drop, even a couple percentage points, maybe due to a little bit of a market swing, we were gonna get a phone call or an email from this client asking, Am I okay?
• 1:36
  SPEAKER_00: Can I still spend this?
• 1:38
  SPEAKER_00: Should I reduce my monthly distributions?
• 1:40
  SPEAKER_00: I'm concerned.
• 1:42
  SPEAKER_00: And that's kind of the worst case scenario.
• 1:45
  SPEAKER_00: That's the clients putting so much emphasis on this number that it's starting to drive their life and all of their decisions.
• 1:52
  SPEAKER_00: And I think there's a lot of ways that you can mitigate that early with how you present it, how you construct the conversation and how you talk about what that number is really telling you.
• 2:04
  SPEAKER_00: But that can really get lost over time and it can become something that the client really anchors to and structures their whole life around, which is really not what we want to be happening with the Monte Carlo.
• 2:15
  SPEAKER_01: Yeah.
• 2:16
  SPEAKER_01: Yes.
• 2:17
  SPEAKER_01: And in the Monte Carlo and the way it's calculated and what it signifies, I think it's complicated enough for many advisors to understand, let alone how the heck is a client supposed to understand the nuances and all that goes into this and be able to properly frame what it's saying and maybe more importantly, what it's not saying.
• 2:36
  SPEAKER_01: So I think a good message for advisors listening is if you're like, man, my clients keep, they're they're misunderstanding this, they're getting too attached to this.
• 2:42
  SPEAKER_01: It's like, okay, it's on you, it's on us.
• 2:46
  SPEAKER_01: How can we better explain and organize our thinking around how do you properly interpret what that number is doing?
• 2:54
  SPEAKER_01: And it reminds me of something called Goodhardt's Law.
• 2:58
  SPEAKER_01: And the law says when a measure becomes a target, it ceases to be a good measure.
• 3:04
  SPEAKER_01: To me, that's a good description of the Monte Carlo score.
• 3:07
  SPEAKER_01: When the measure, which is the score, becomes the target, it ceases to be a good measure.
• 3:12
  SPEAKER_01: Because now all of a sudden, what's supposed to be success, your dreams, your goals, your vision gets translated down into this Monte Carlo score.
• 3:22
  SPEAKER_01: And what's good?
• 3:23
  SPEAKER_01: Is 100% good?
• 3:24
  SPEAKER_01: Is 80% good?
• 3:25
  SPEAKER_01: Is 60% good?
• 3:26
  SPEAKER_01: Like, where how do you start to do that?
• 3:28
  SPEAKER_01: How do you start to think through that?
• 3:30
  SPEAKER_01: And I think that one of the first things, and this actually comes from a, I think, I believe a blog, some article that Michael Kittsis wrote, he suggested retiring the term success.
• 3:44
  SPEAKER_01: Like, what's my probability of success?
• 3:47
  SPEAKER_01: What's my Monte Carlo success score?
• 3:49
  SPEAKER_01: And so it's in the term.
• 3:50
  SPEAKER_01: It's like, of course, we want success.
• 3:52
  SPEAKER_01: And so when I'm talking to Eden and I'm saying, hey, Eden, I want to travel and I want to retire and I want to spend this much.
• 3:57
  SPEAKER_01: And I know that's success, but then when I see a financial planning dashboard and all I'm seeing is a Monte Carlo score, how could I not interpret, okay, this is telling me in my Aiden all bad?
• 4:09
  SPEAKER_01: So it's it almost becomes this um a misinformed indicator of success.
• 4:17
  SPEAKER_01: So the label is what's driving behavior here, and it's okay, this is success.
• 4:20
  SPEAKER_01: And it almost reminds me of this is probably not the right analogy, but do you remember Tamagotchis?
• 4:27
  SPEAKER_01: We might have had this conversation before.
• 4:29
  SPEAKER_00: Of course.
• 4:30
  SPEAKER_00: Okay.
• 4:31
  SPEAKER_01: And how success repeating Tamagotchis?
• 4:34
  SPEAKER_00: I had at least two as a child.
• 4:37
  SPEAKER_01: Okay.
• 4:37
  SPEAKER_00: Why two?
• 4:38
  SPEAKER_00: I don't know, but more than one for sure.
• 4:41
  SPEAKER_01: And how did your Tamagotchis do?
• 4:43
  SPEAKER_00: It ebbed and flowed, but they did pass on for sure.
• 4:49
  SPEAKER_00: They were healthy for some times, but they did pass on.
• 4:52
  SPEAKER_01: Were you obsessed with it?
• 4:54
  SPEAKER_00: Yes, I was.
• 4:56
  SPEAKER_01: To me, that's almost I never had one, but neighbors did.
• 5:00
  SPEAKER_01: And so I'd be obsessed with like going and watching them feed theirs and clean up after.
• 5:04
  SPEAKER_01: And it was just so, in retrospect, bizarre.
• 5:07
  SPEAKER_01: And I almost get that same feeling with Monte Carlo score sometimes.
• 5:10
  SPEAKER_01: Like it's this little pet that we need to maintain and we need to feed and we need to sacrifice what we're doing to make sure it's okay.
• 5:18
  SPEAKER_01: And it's like, man, that's it's not real life.
• 5:21
  SPEAKER_01: It's not life.
• 5:22
  SPEAKER_01: Like that's not your that's not your financial plan.
• 5:25
  SPEAKER_01: Tamagotchi's not your actual real life, but we can become so attached to it because I think what we all want is something simple that says, are we going to be okay or not?
• 5:37
  SPEAKER_01: And because that's hard to get when you look at the complex nature of financial planning and all the decisions that go into it, and all the variables that go into it, and all the unknowns that go into it, there is something that just feels reassuring about having one simple little score, having a little Tamagotchi that I just want to prioritize taking care of this thing.
• 5:58
  SPEAKER_01: Um, going back to Kitsis, he says, well, maybe we reframe it.
• 6:02
  SPEAKER_01: Maybe you don't call it probability of success as much as probability of adjustment or probability of excess.
• 6:10
  SPEAKER_01: Because if it's truly probability of success, who wouldn't want 100%, not just want, but who wouldn't demand 100% probability of success?
• 6:22
  SPEAKER_01: And so I think that the message we need to send to clients, first and foremost, is your Monte Carlo score is not a financial plan.
• 6:33
  SPEAKER_01: And if you have a financial planner and their version of running a financial plan for you is showing you some arbitrary number and saying, hey, this is it, you don't have a very good financial planner, I'll put it bluntly.
• 6:44
  SPEAKER_01: A financial plan should be telling you what to do, when to do it, how much you can spend, what at what point might adjustments be needed.
• 6:52
  SPEAKER_01: There's so much more that goes into it that is not distilled down into a simple Monte Carlo score.
• 6:59
  SPEAKER_01: So I I think of this as to me, there's three important uh components to this.
• 7:05
  SPEAKER_01: And if I'm talking to Eden as a client, the way I'm gonna message this is I'm gonna say, look, Eden, this is this number that you're looking at, this is commonly known as Monte Carlo score.
• 7:18
  SPEAKER_01: The term score makes it seem like of all the things happening in your financial strategy, this single number is the sign of whether it's working or not.
• 7:28
  SPEAKER_01: But to me, I don't I don't want to say it's unimportant, but I don't want to exaggerate its importance at the same time.
• 7:35
  SPEAKER_01: To me, there's actually three things that coincide with this that I'm gonna pay way more attention to as your advisor that actually allow me to interpret that score and whether it's high, whether it's too low, whether it's right where it needs to be.
• 7:50
  SPEAKER_01: The first is your spending flexibility.
• 7:55
  SPEAKER_01: If you retire and you want to spend$8,000 per month, and we look at that$8,000 per month, it's it's all essentials.
• 8:02
  SPEAKER_01: Like if we had to cut that, you would be cutting back on something that's essential.
• 8:06
  SPEAKER_01: Housing, food, transportation, like what it you don't have any margin to cut.
• 8:11
  SPEAKER_01: That's all required lifestyle stuff.
• 8:14
  SPEAKER_01: Um, that's a lot different than if you were retiring Eden and you wanted to spend$8,000 per month.
• 8:20
  SPEAKER_01: But$3,000 of that was on purely discretionary stuff.
• 8:24
  SPEAKER_01: Fun, entertainment, extra travel, whatever it is.
• 8:29
  SPEAKER_01: Each of those scenarios, I'm gonna feel very different about what Monte Carlo score I might feel comfortable with.
• 8:36
  SPEAKER_01: In the first scenario, you have no margin for error, meaning you have no margin to cut back.
• 8:41
  SPEAKER_01: Cutting back is actually impacting your lifestyle in a material way.
• 8:45
  SPEAKER_01: We're going to need a higher score because if we look at that score, and again, reframing it is not as probability of success, but let's say it's probability of adjustment.
• 8:55
  SPEAKER_01: If I know, Eden, that some of your expenses aren't totally necessary, and we don't want to cut them, but we have room to cut if we needed, that's gonna be one of the single biggest levers we have to pull if and when that adjustment's needed.
• 9:09
  SPEAKER_01: So if you have a probability of success of 80%, uh 20% of the time, we're going to need to make an adjustment.
• 9:16
  SPEAKER_01: And that adjustment, the easiest one, is cut back spending temporarily.
• 9:20
  SPEAKER_01: Now, if you don't have the means of doing that, that's not an option.
• 9:25
  SPEAKER_01: So we we probably need a higher probability of success versus if a big chunk of your spending is discretionary, now all of a sudden we can start at a much lower probability of success because we know that we have the levers that we can pull if and when they're needed to ensure you're staying on track without risking running out of money.
• 9:47
  SPEAKER_01: So the first thing that I care about is not just probability of success in a vacuum, but probability of success relative to how much spending flexibility do you have so that we know what we can potentially do if something happens.
• 10:03
  SPEAKER_01: Make sense so far?
• 10:04
  SPEAKER_01: Anything that is unclear about that?
• 10:08
  SPEAKER_00: No, I think that's spot on and just speaks to how we approach planning in general.
• 10:12
  SPEAKER_00: No two clients are exactly the same.
• 10:15
  SPEAKER_00: I've never had two clients where they have an identical situation.
• 10:19
  SPEAKER_00: No two, we're not gonna approach everyone's Monte Carlo the same way.
• 10:22
  SPEAKER_00: It's unique to every client situation.
• 10:25
  SPEAKER_00: So that is definitely spot on and something I see every day in this role.
• 10:30
  SPEAKER_00: Yeah.
• 10:31
  SPEAKER_01: Awesome.
• 10:32
  SPEAKER_01: So that's the first point that I want to interpret your probability of success, your Monte Carlo score, through that lens is how much spending flexibility do we have.
• 10:43
  SPEAKER_01: The second lens that I want to look at that through is not just understanding what's your probability of success, but what's the severity of failure.
• 10:54
  SPEAKER_01: Again, there's a great Kitts' piece on this for anyone who's watching, just Google.
• 10:57
  SPEAKER_01: It's it's it was really good.
• 10:58
  SPEAKER_01: Let's assume, Eden, that you have a fully paid-for home, you're retiring, you have a rental property, you have strong social security income coming in, you have a pension, and you want to spend$11,000 per month in retirement, and$10,000 per month is coming in from those other sources.
• 11:17
  SPEAKER_01: Rental property, social security, pension.
• 11:20
  SPEAKER_01: Now, you want$1,000 from your portfolio, is what that's saying.
• 11:25
  SPEAKER_01: So you want to spend$11, 10's already coming in from other income sources.
• 11:30
  SPEAKER_01: Let's assume that you only have$150,000 in your IRA.
• 11:34
  SPEAKER_01: Well, if you're spending$1,000 a month from that, that's$12,000 per year.
• 11:38
  SPEAKER_01: That's an 8% uh withdrawal rate.
• 11:41
  SPEAKER_01: That's a pretty high, that's that's not a super sustainable rate.
• 11:45
  SPEAKER_01: Now it could happen if markets are really good.
• 11:47
  SPEAKER_01: But I have to ask myself, how concerned am I really?
• 11:52
  SPEAKER_01: Because, like, yes, there's a high probability that you do run out of money there, but does that necessarily mean failure?
• 11:59
  SPEAKER_01: I would argue no.
• 12:02
  SPEAKER_01: That$150,000 IR, right?
• 12:04
  SPEAKER_01: Like it's something, but you've got a strong pension, you've got strong social security, you have a rental property, you have a fully paid for home.
• 12:10
  SPEAKER_01: Like, that's making up a relatively small portion of what you're actually using to live on.
• 12:16
  SPEAKER_01: A probability of success score doesn't properly provide that context.
• 12:20
  SPEAKER_01: It's not telling you, okay, it's it's all it's looking at is do you run out of money or don't you?
• 12:25
  SPEAKER_01: Um running out of money sounds like a big deal until you realize, like, hey, in retirement, there's other sources of income besides money is effectively your portfolio.
• 12:35
  SPEAKER_01: Your portfolio may or may not be the main thing that is driving this.
• 12:40
  SPEAKER_01: If you, I don't know, you're you're a couple, it's two retired teachers, like they might have strong pensions, two retired, you know, a retired uh fire department or a retired firefighter, a retired government employer.
• 12:52
  SPEAKER_01: There's probably pretty strong pensions where like, yes, the portfolio is also important, but the severity of failure is not that significant.
• 13:01
  SPEAKER_01: So the less severe, the lower the severity of failure, the lower the probability of success, the lower the Monte Carlo score, I would be comfortable with, Eden, with you deciding to retire and having that.
• 13:16
  SPEAKER_01: On the flip side, if we go back to you wanting to spend$11,000 per month in retirement and you have no social security, no pension, no rental property, you don't have a paid-for home, you have no home of your renting, let's say, I need a much higher probability of success because your portfolio is all that you have to be able to maintain that.
• 13:35
  SPEAKER_01: So we have to not just look at again the score by itself, but the score relative to what actually happens in that portion of the Monte Carlo score where you quote unquote fail.
• 13:48
  SPEAKER_01: Is that true failure?
• 13:51
  SPEAKER_01: Does that make sense?
• 13:53
  SPEAKER_00: Yeah, absolutely.
• 13:54
  SPEAKER_00: Tracking right along.
• 13:55
  SPEAKER_01: So the the thing I think we're coming back to or we're getting at is what we started with.
• 14:00
  SPEAKER_01: Like what actually is success?
• 14:03
  SPEAKER_01: Like, yes, of course we don't run out of want to run out of money, but before going to point three, like the thing I would say to clients is Eden, um if they're getting to, let's say, focus on the Monte Carlo score, or maybe I can since they're getting nervous about what their score is or how it should be interpreted, and say, Eden, let's let's walk through an exercise here real quick.
• 14:22
  SPEAKER_01: Um let's say I came back to you, you're getting ready to retire, and I said, I don't want you to retire, I don't want you to take the trips you're gonna take, I want you to keep maximum out your 401k, I want you to keep deferring social security, I want you to keep saving, saving, saving, keep spending less and less because you are going to have a 100% probability of success with your plan.
• 14:44
  SPEAKER_01: How does that advice sound?
• 14:49
  SPEAKER_01: Probably not great.
• 14:51
  SPEAKER_00: Not great.
• 14:52
  SPEAKER_00: It's not great.
• 14:53
  SPEAKER_00: And that's the side of that 100% score that a client won't necessarily recognize and understand.
• 15:01
  SPEAKER_00: Yeah.
• 15:02
  SPEAKER_01: It looks successful when interpreted through one single lens.
• 15:07
  SPEAKER_01: And that single lens is do you have money left when you die?
• 15:11
  SPEAKER_01: Is all that's asking.
• 15:13
  SPEAKER_01: That is such an oversimplified version of success.
• 15:16
  SPEAKER_01: Of course, when you take things to the extreme, sometimes taking things to the extreme is a good way of, you know, um, showing the flaws in a specific way of thinking.
• 15:26
  SPEAKER_01: And I think it does that for clients.
• 15:27
  SPEAKER_01: If of course that's not success.
• 15:29
  SPEAKER_01: Your success, Eden to me, is actually, you know, you shared with me, you want to do boom, boom, boom.
• 15:34
  SPEAKER_01: You shared with me, here's what your dreams actually are.
• 15:36
  SPEAKER_01: You shared with me, here's the leg.
• 15:37
  SPEAKER_01: That's what we're going for.
• 15:39
  SPEAKER_01: And the Monte Carlo score is going to give us a general sense of are we tracking towards that or not, but it's not going to be the driving factor in the decisions that we make.
• 15:49
  SPEAKER_01: Because what it wants is for you to have more and more money left over when you die, so it can be a higher and higher number.
• 15:54
  SPEAKER_01: That's not my goal, and I don't think that's your goal.
• 15:57
  SPEAKER_01: So starting with a proper framing of a hundred percent of success, in many cases to me, actually might be a sign of failure.
• 16:06
  SPEAKER_01: Because what it's really saying is you're leaving a whole lot on the table that you otherwise could have done, depending, of course, on the situation.
• 16:13
  SPEAKER_01: Um so far, so good, or any questions on any of that?
• 16:16
  SPEAKER_00: So far, so good.
• 16:19
  SPEAKER_01: The third lens that I would interpret a Monte Carlo score through is through the lens of are we looking at this plan almost on like a one-time engagement, a one-time thing, or is this as part of an ongoing relationship?
• 16:40
  SPEAKER_01: Because if it's as part of an ongoing relationship, you're like, here's the good news.
• 16:42
  SPEAKER_01: Part of my job as your advisor is to stay on top of this for you.
• 16:46
  SPEAKER_01: That does not mean that every time the market goes up or down a little bit, or your score changes just a little bit, we're reevaluating everything, that's not helpful.
• 16:54
  SPEAKER_01: That's not productive.
• 16:56
  SPEAKER_01: That's um, you know, we want to separate the noise from the signal, so to speak.
• 16:59
  SPEAKER_01: And there's gonna be a lot of noise here.
• 17:00
  SPEAKER_01: What I'm focused on is the signal.
• 17:02
  SPEAKER_01: Is what are those meaningful points in time where a change is necessary in order for you to ensure that you can continue living the life that you want to live in retirement.
• 17:11
  SPEAKER_01: Being said, if we're working together on an ongoing basis, what it does mean is if you have a Monte Carlo score, let's say of 60%, there's likely to be a time where I come back to you and say, Eden, I think it's prudent.
• 17:24
  SPEAKER_01: We make you temporary cut of spending.
• 17:27
  SPEAKER_01: We defer a trip, we do something to make sure that you're not overspending your portfolio in the midst of a market downturn and not being able to recover.
• 17:36
  SPEAKER_01: Here's the good news like that that single adjustment or a couple adjustments for your retirement, that that might be the difference.
• 17:43
  SPEAKER_01: Like that might be all it takes for this to be just fine for the rest of your life.
• 17:49
  SPEAKER_01: Versus if you're looking at a plan right now, Eden, and you want to know, okay, I need to, I kind of just want to set it and forget it.
• 17:57
  SPEAKER_01: Like I'm running a plan to see, can I retire?
• 17:59
  SPEAKER_01: I don't want to have, I'm not working with an advisor, I'm not doing this on my own on an ongoing basis, I'm not reevaluating where things stand.
• 18:05
  SPEAKER_01: Um, you're gonna need to have a higher probability of success to start.
• 18:11
  SPEAKER_01: Because essentially what you're saying is like there's not gonna be those adaptations or those adjustments along the way, which is fine.
• 18:18
  SPEAKER_01: But it just means like there's probably gonna be less that you're gonna spend from the beginning or you're gonna work longer to build a bigger balance before retiring.
• 18:24
  SPEAKER_01: So, some of this is to what degree is there ongoing monitoring of this, either with an advisor or by yourself.
• 18:34
  SPEAKER_01: But the more committed we are to saying, yeah, like this is gonna be part of the ongoing process to reevaluate this, the lower the initial probability of success needs to be because you know, again, if we're reframing it from probability of success to probability of adjustment, cool.
• 18:50
  SPEAKER_01: Like the adjustment's built in to what you're doing.
• 18:54
  SPEAKER_01: Um none of those answers the question exactly of is 80% good for your Monte Carlo score, is 50%, is 100%, is 20%?
• 19:05
  SPEAKER_01: And the reality is there's not a universal answer to that, as much as understanding how these variables come to be.
• 19:14
  SPEAKER_01: And most importantly, I think is understanding this is not a financial plan.
• 19:20
  SPEAKER_01: I don't know what the right analogy is for it, but it's almost like you're traveling across the country and you're just, you know, you got your, you know, AirPods in, and it's you're it's it's almost like playing Marco Polo across the country.
• 19:34
  SPEAKER_01: Like you just start walking and someone's saying hotter, colder, colder, hot.
• 19:37
  SPEAKER_01: It's like that's that's not like a great way to do this.
• 19:41
  SPEAKER_01: This is maybe a horrible analogy.
• 19:42
  SPEAKER_01: I've never thought it through before saying it, so apologies if it wasn't one.
• 19:45
  SPEAKER_01: But like a real plan might be, hey, Eni, you're coming up against a mountain range.
• 19:49
  SPEAKER_01: Like you're gonna need to go north for a while.
• 19:51
  SPEAKER_01: Your Monte Carlo score might say colder, colder, colder, colder, but it's the right thing to do because that's not the only indication of success, because you need to get around that to get to where you're going.
• 20:01
  SPEAKER_01: Whereas um, if all you're doing is playing this hotter, colder game, like you it this is a dumb analogy now that I think of it.
• 20:07
  SPEAKER_01: We'll keep it in just for for that, but it's not working.
• 20:11
  SPEAKER_00: Um the bottom line is I mean, I think it it applies to a lot of these situations, though, because I think you can show a lot for a client.
• 20:22
  SPEAKER_00: It's if you're the type of advisor where you like this situation, you're saying a client maybe comes to you, hey, I want to do a remodel and it's this much money.
• 20:30
  SPEAKER_00: And if you, as the advisor, just plug in an expense this year of whatever they say, 150,000, and see what the Monte Carlo is, and that's how you decide whether or not they should do it, it's like that's not what we're gonna do.
• 20:41
  SPEAKER_00: That's not the only thing that we're gonna look at in that situation.
• 20:45
  SPEAKER_00: I think that does point to this analogy of it's not the North Star, the only thing that we're gonna pay attention to when it comes to the mountain range ahead of you.
• 20:54
  SPEAKER_00: Sure, we'll look at how that impacts Monte Carlo, but that's not gonna be, oh, okay, Monte Carlo looks fine, you can do it.
• 21:01
  SPEAKER_00: Yeah, we're definitely gonna look at lots of other factors, how that plays into the plan.
• 21:05
  SPEAKER_00: And so it's there as more of a compass and a guide as you go through this journey, but it's not the end-all be-all when those mountain ranges pop up.
• 21:15
  SPEAKER_00: And it shouldn't be, especially as an advisor.
• 21:19
  SPEAKER_01: Yeah, exactly.
• 21:21
  SPEAKER_01: Do you with this in mind, are there certain client moments or even advisor moments that come to mind that that are common traps that people fall into that could be avoided if they I know you mentioned the one of hey, this client lived and died by their Monte Carlo score.
• 21:40
  SPEAKER_01: How commonly do you see stuff like that?
• 21:44
  SPEAKER_00: I would say here in my time at Root, it's been very refreshing to just see at least Naomi's take on this and going through a full Sequoia process from start to finish with clients, and how we really have only looked at the Monte Carlo once in the income meeting, and it doesn't really come up again throughout the rest of the process.
• 22:08
  SPEAKER_00: I think that's great and has been super refreshing.
• 22:12
  SPEAKER_00: But I think another thing that Naomi does a really good job of is early on when we first share that score, depending on what it is, whatever the situation is, it's really easy and helpful, I think, to share with the client what really puts stress on the Monte Carlo score and what doesn't.
• 22:28
  SPEAKER_00: Because I will say just another situation I think of is a client wants to take maybe like a slightly bigger trip, like maybe$10,000 more than they normally do.
• 22:36
  SPEAKER_00: And they're like, oh, let's put that in Monte Carlo.
• 22:39
  SPEAKER_00: I want to see if it impacts it.
• 22:40
  SPEAKER_00: Generally, it's not even going to move the percentage for things like that.
• 22:44
  SPEAKER_00: And Naomi does a really good job of showing, okay, if you change your monthly spending significantly, your retirement monthly expense, if you increase that, that's something that would tend to put more, it would have more of an impact on the Monte Carlo than these one-off things that you think of.
• 23:01
  SPEAKER_00: And I think that is a common trap that clients can fall into is even a small, larger expense or something that I want to do, is that going to really negatively impact things?
• 23:11
  SPEAKER_00: Generally speaking, no, it's not.
• 23:14
  SPEAKER_00: It's those extended larger withdrawals that would put more stress on it.
• 23:18
  SPEAKER_00: And that's something that Naomi does a great job of showing.
• 23:21
  SPEAKER_00: And I think it really helps clients kind of take that stress off.
• 23:24
  SPEAKER_00: Should I buy a first class ticket this time?
• 23:27
  SPEAKER_00: You probably can.
• 23:28
  SPEAKER_00: It's not really going to move the needle.
• 23:30
  SPEAKER_00: Yeah.
• 23:32
  SPEAKER_01: Yes.
• 23:32
  SPEAKER_01: And I think along with that point is let's say the client says, hey, in five years, can I spend an extra$20,000 on a vacation?
• 23:39
  SPEAKER_01: Um, it's probably not going to move the needle much.
• 23:42
  SPEAKER_01: But what a Monte Carlo score isn't able to do is it's it's looking at the next 20, 30 years, however long the client's going to live, and boiling that all down to a number today, where like the reality is, okay, Eden, you want to spend an extra$20,000 on a trip in five years.
• 23:59
  SPEAKER_01: Let's assume you can do it.
• 24:00
  SPEAKER_01: But in in five years, there's a horrible bear market and everything's down 40, 50%.
• 24:06
  SPEAKER_01: Monte Carlo is not accounting for the fact that are we making a judgment call at that time to say, do we push this trip following?
• 24:12
  SPEAKER_01: Right.
• 24:13
  SPEAKER_01: That's point number one.
• 24:14
  SPEAKER_01: It's like it's still modeling out, okay, what's the return characteristics of each of the underlying asset classes in your portfolio?
• 24:20
  SPEAKER_01: What are the risk characteristics?
• 24:21
  SPEAKER_01: So standard deviation of each of the asset classes in your portfolio, how long might you live?
• 24:25
  SPEAKER_01: Model that out with like fixed static spending.
• 24:28
  SPEAKER_01: It's not making those adjustments.
• 24:30
  SPEAKER_01: Like that's part of why we do planning is we can make those real-time adjustments.
• 24:34
  SPEAKER_01: And then the second really important thing is Monte Carlo is looking at your portfolio and then stress testing that through various market conditions, using again the range of potential outcomes as driven by the standard deviation of each asset class.
• 24:52
  SPEAKER_01: But one of the reasons that we we have our root reserves approach within retirement is we're not taking just the generic, let's say, 60-40 portfolio.
• 25:02
  SPEAKER_01: You invest in this, and when the markets draw, whether they're up or down, like you're just taking a proportionate amount from each asset class.
• 25:09
  SPEAKER_01: What we're doing is we are building in flexibility so that when that downturn happens, because we know it will, whether the market's down 20%, 30%, 40%, or more, Monte Carlo's assuming we're just kind of pulling from everything, like but we're not pulling from everything.
• 25:27
  SPEAKER_01: We're giving ourselves and our clients the flexibility to ideally have something that can be pulled from that's not way down.
• 25:36
  SPEAKER_01: And what really, you know, we talk about sequence of return risk, and that's a big part of Monte Carlo is if you're spending and the market's declining, like that's where you're seeing those negative outcomes.
• 25:45
  SPEAKER_01: Yep.
• 25:46
  SPEAKER_01: But if you can engineer your portfolio in such a way so that, yes, you're still gonna be spending, but you're not gonna be drawing down the assets that are getting most hammered by the market.
• 25:56
  SPEAKER_01: And if we can realize that we're gonna be reasonable humans, and if if we think that that trip all of a sudden is not we're gonna take it.
• 26:03
  SPEAKER_01: But do we take it next year or the following year?
• 26:05
  SPEAKER_01: Those are judgment calls we can make in the moment that Monte Carlo can never project out in advance.
• 26:10
  SPEAKER_01: And so I think that it's a good opportunity to explain how we're not just um, you're not just a cog in this Monte Carlo machine.
• 26:20
  SPEAKER_01: Okay, you got to you get an 87% probability of success, you get a 72%.
• 26:23
  SPEAKER_01: It's no, like we're gonna use this, engage this, but also like this is why we do the planning work that we do.
• 26:28
  SPEAKER_01: This is why we invest the way that we do.
• 26:31
  SPEAKER_01: This is why maybe if there's a big market downturn, we might accelerate some Roth conversions because we're converting more at depressed prices and the recovery happens on the flip side.
• 26:40
  SPEAKER_01: This is so it's just this is why all these actual proactive things that we're doing, that's why we do them.
• 26:46
  SPEAKER_01: Because there's some opportunity.
• 26:48
  SPEAKER_01: So whether the market's up or down, there's gonna be opportunities for different types of things that we're gonna do as your advisor.
• 26:54
  SPEAKER_01: And those can't be captured in a Monte Carlo score, like they can be with an actual ongoing relationship.
• 27:01
  SPEAKER_01: So I think more than anything, it's a good opportunity to reframe to clients what it is and what it isn't, that being a Monte Carlo score, and then go deeper into this is why we invest this way.
• 27:15
  SPEAKER_01: This is why we are going to be updating this plan and your spending projections regularly.
• 27:21
  SPEAKER_01: And of course, you've got to find the balance.
• 27:23
  SPEAKER_01: I think you said this somewhere of how do you not over-explain, but at the same time not under-explain?
• 27:29
  SPEAKER_01: But how do you appropriately explain all this to give the proper sense of what it is without uh detailing them to death with everything that you could talk about with Monte Carlo?
• 27:42
  SPEAKER_01: Anything else in here that you see or that you think should be added to the Monte Carlo conversation?
• 27:50
  SPEAKER_00: I would just say I think a couple weeks ago when we were talking about the ACE framework, we talked about the power of role-playing.
• 27:56
  SPEAKER_00: This is a prime example of something that's very easy to role-play with.
• 28:00
  SPEAKER_00: If you have a client meeting coming up and you've built out their plan and you see what the probability the Monte Carlo is going to be, and you're not really sure, am I even explaining this well?
• 28:12
  SPEAKER_00: It's a great opportunity to tag team somebody and just go through how you would say it and see what they think.
• 28:17
  SPEAKER_00: I think that's always there.
• 28:18
  SPEAKER_00: And it's good to practice having kind of a one-to-two-minute spiel that you're prepared for, whether the client says, yes, I am familiar with Monte Carlo or no, I've never seen it before, being prepared for either of those and knowing how to navigate that.
• 28:32
  SPEAKER_00: I think role-playing and practicing that is great for sure.
• 28:37
  SPEAKER_00: Um yeah, other than that, I just think it's it's an important thing on our end as the advisor to coach the client on early.
• 28:46
  SPEAKER_00: There's a lot that we can do early, like everything we've talked about today, just coaching them through what this means, what it doesn't mean, what we should focus on, what we shouldn't focus on, can really help mitigate future changes to that score and just letting the client know that the score is going to change over time.
• 29:03
  SPEAKER_00: This plan is a living, breathing plan.
• 29:05
  SPEAKER_00: It's going to change as your life changes.
• 29:07
  SPEAKER_00: The score is going to fluctuate as market conditions change.
• 29:10
  SPEAKER_00: It's not the end-all be-all.
• 29:12
  SPEAKER_00: It's more of a guide that helps us know where we are, where we stand, what what changes and adjustments, like you said, need to be made.
• 29:19
  SPEAKER_00: I think probability of adjustment is the best way to say what Monte Carlo is.
• 29:24
  SPEAKER_00: That's a great takeaway.
• 29:26
  SPEAKER_00: But yeah, I think it's there's no perfect answer for sure on this one.
• 29:31
  SPEAKER_01: This is part of living in the ambiguity of financial planning.
• 29:34
  SPEAKER_01: If you're dealing with unknowns and there's not a formula for uh perfect success, but understanding what something is saying in understanding how different situations, whether that be is this a one-time thing or is this an ongoing thing, whether it's understanding severity of failure, whether it's understanding how much flexibility is there in spending decisions that you're making, all those are going to drive different outcomes in terms of what score and what range of scores are we comfortable with for our particular client.
• 30:07
  SPEAKER_01: But um, great idea for the episode, Eden.
• 30:10
  SPEAKER_01: Thank you for this.
• 30:11
  SPEAKER_01: Thank you for everyone who's watching.
• 30:13
  SPEAKER_01: If you have not already done so, please make sure that you subscribe.
• 30:16
  SPEAKER_01: We're on YouTube, Root Ready Podcast, we're on Apple, we're on Spotify, we're all those places, and share it with a friend if you think they might get some value out of this.
• 30:24
  SPEAKER_01: But that is it for this time.
• 30:25
  SPEAKER_01: Thank you all, and we'll see you next time.