Ep. 260 – Why Savvy Savers Should Spend More in Retirement – Part 2

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In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss in detail the importance of spending more in retirement as a savvy saver. Taylor provides a numerical analysis and insights into how spending habits in retirement can impact your financial plan in a scenario of a sample retired couple in their late 60s.

Listen in to learn the importance of aligning expenses with income sources and assets in retirement planning, considering inflation and the potential for increased expenses. You will also learn the importance of enjoying retirement and fulfilling bucket list items even when they require larger withdrawals.

In this episode, find out:

• A practical scenario of a retired couple’s income sources, assets, and spending habits.
• The steps we take our clients through when building a successful financial plan in retirement.
• The importance of aligning expenses with income sources and assets in retirement planning.
• Understanding strategies for accommodating increased spending in retirement.
• Why you should enjoy your retirement and fulfill bucket list items with occasional larger withdrawals.
• Don’t get caught up in the numbers; understand that income, assets, and expenses differ for different people.

Tweetable Quotes:

• “Our job is to bring comfort to the idea that every now and then you can take a larger withdrawal to satisfy a bucket list wish you’ve been putting off for so long.”– Murs Tariq
• “Although it may appear costly initially and impact retirement planning, ultimately, your efforts have led you to this point.”– Murs Tariq
• “Do not get caught up in the numbers; your numbers are your numbers; the relationship between what you’re spending and what you have completely differs for different people.”– Radon Stancil

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:
Welcome to Secure Your Retirement Podcast. We are continuing a conversation today that we had last week and this conversation we have brought on our in-house financial planning guru of all things, Taylor Wolverton. So, Taylor, thanks for coming on and chatting with us today.
Taylor Wolverton:
Hello. Thanks for having me.
Radon Stancil:
So, last week we talked about this topic of savvy savers, why they should spend more in retirement and we gave a foundation. So, if you didn’t hear last week, go back and listen to last week, then come back and listen to this week because we’re actually going to provide all the numbers today for this concept that we had last week, but very, very, very quick. The concept was this, Murs and I and our advisors, as we are sitting down with individuals, many times, most of the time, they have no problems, they’re not going to run out of money. The reality of what it is that they’re going to end up giving sometimes millions of dollars to their beneficiaries, and there’s no problem with that. But sometimes the fear is so great that they’re going to run out of money, that they won’t spend any money.
And so, we said that, “Let’s just look at the impact,” after we gave this foundation, and that’s why we brought on Taylor because Taylor is the one who builds all these plans for us and helps us to deliver this concept to individuals. So, we wanted to have Taylor on and we’re going to, hopefully today, verbalize what we normally see in picture what we have on the screen. So, let’s just start it off, Taylor, can you give us, first of all, our sample client and a little bit about them? I’d like to know the sample client’s age and let’s just kind of go down the age and what they’re getting for social security and those basic steps up front.
Taylor Wolverton:
Yes. Okay. So, in this example, we have a husband and wife. They are both 69 years old right now. They’re both fully retired, so neither of them are working or have any sort of wages or employment income. They have social security. Both of them are receiving benefits. So, the wife is receiving $2,700 a month from social security and the husband is receiving $4,000 a month from social security. The wife also has a pension that she is receiving $1,900 a month from, and those are their primary sources of fixed income right now. And then they also have their assets to rely on for distributions. Do you want me to run through those next?
Murs Tariq:
Yeah, that would be great.
Taylor Wolverton:
Okay. So, right now, they have close to $200,000 in the bank just in cash savings. And then, they each have an IRA. The wife’s IRA balance right now is about $830,000, the husband’s IRA balance is $1,360,000 right now. And then they also each have a Roth IRA. So, the husband’s Roth IRA right now is up about $50,000 and the wife has $44,000 in a Roth IRA. They also have about $80,000 in stock just in a taxable brokerage account.
Murs Tariq:
So, when you add up their assets to work with for retirement to draw on as they need, what does that total come to roughly?
Taylor Wolverton:
We have a total $2,563,000 between their cash savings, the Roth IRAs and their stock.
Murs Tariq:
Okay, so perfect. So far what we know is that we know what they have coming in the door, they each have social security and they’ve got pension, relatively reliable. They know what’s coming in the door, there’s some taxes associated with that. Then we’ve got money to work with. And what I tell people is, well, what is just as important is how much are they going to spend in retirement and how does that line up with their money coming in the door plus their assets? So, let’s talk about their spending habits. Do we have that information?
Taylor Wolverton:
Yes. Okay. So, in this example we have that right now they are spending about $12,000 a month to cover all of their expenses. That does also include about $6,000 to $7,000 a year that they typically use to put towards travel, so they may not be spending that every single month, but that comes out to an annual amount. So, $12,000 a month is what we have them spending right now, and we are including inflation on that amount. When we’re looking long-term through the remainder of their retirement, we’re inflating their expenses at 3% each year.
Murs Tariq:
Okay, great. So, we’ve got money coming in the door from sources, we’ve got assets to work with. We now know that they spend about, or they want to spend about 12,000 a month in their normal living, especially on the earlier side of retirement. And so, when we’re in these meetings, we’re walking the client through this, they provided all the data. And usually, ideally, we have it all up front before we go into this meeting, but we’re making tweaks along the way. Maybe a lot of times they forgot about a small pension they may have, or they forgot about this savings account that they don’t really think about, or a Roth account or an old 401(k). So, we’re updating these plans as we go if there’s anything missing, and then we check on expenses to see where that’s at.
And then, the next big piece is we go to put it all together in a nice easily viewable way, which we call the retirement tab. And that takes everything and puts into one page. It shows us what’s coming in the door, the assets we have to work with. And then, also what’s going out the door. Taylor mentioned something really important there that today they spend 12,000, but because of inflation and in this day and age we’re very, very aware of inflation, we have to assume it’s going to be there going forward, so the plan we are allowing for inflation throughout the entirety of it.
Also, on the assets we are making an assumption on a rate of return. Any financial planning software, any financial advisor is always going to assume some type of rate of return on assets. We tend to keep that on the more conservative side. We like to build our plans stress-tested, so we’re usually running somewhere in the realm of a 4% or 5% rate of return. That part doesn’t matter all that much for this conversation today, but just realize that we are assuming some type of rate of return. So, Taylor, what I’d like if you could and realize everyone is kind of listening to us and we’ll give them options to see this better, but kind of walk us through maybe the first line of what that retirement page looks like as they sit here at age 69.
Taylor Wolverton:
Yes. Okay. So, like I said before, they have $1,900 a month from the pension. So, that’s shown here in the first column. Their combined social security benefits between the two of them is $6,700 total. So, when we’re adding up the pension and the social security, we’re subtracting out an estimate as far as what their tax withholdings would be that they owe on both of those sources of income. We’re estimating they have about $8,400 a month in net income to work with from pension and social security. So, what their expenses right now, at about $12,000 a month, we have somewhere around $3,840 left that needs to be distributed from their accounts to make up the difference after they’ve already spent their pension and their social security. And again, the total of their savings and investment accounts right now is over two and a half million dollars. So, that’s what they have available to take those distributions from to cover their expenses that they still have left over once they’ve spent their pension and social security.
Murs Tariq:
And it’s very important here that we understand the relationship between the fixed income coming in the door, realize that there’s some taxes that come off of that. So, we’ve got net dollars in the door, just like you would look at a paycheck, right? And what was that number again, Taylor, 8,000?
Taylor Wolverton:
Yeah, $8,400 a month.
Murs Tariq:
$8,400 a month. And you said something very key is that, hey, if they want to spend 12,000 at the beginning of their retirement, clearly 12,000 is not coming in the door from fixed sources, so we’re going to have to generate that additional almost $4,000 a month. And what we have to look at as advisors and projecting this out for the rest of their lives is that does the plan work? That’s step number one is just based off of creating this baseline look of a plan, they’ve got money to work with, they need about 4,000 a month or $48,000 a year net in the door after taxes. How does this plan start to operate?
So, typically in a meeting, what we would do is we’d say we start scrolling down the years. They’re 69 now. As we get to say age 80, so project forward 10 years, a couple of things have happened, maybe they’ve gotten some social security increases and their assets have also grown, but they’re still drawing. And remember I said that thing about inflation. So, let’s start with that one, Taylor. The 12,000 a month today, just to get to age 80, pure numbers here on a 3% inflation rate, what do their expenses go to now?
Taylor Wolverton:
Their expenses by age 80 with the 3% a year inflation assumption that we have built in comes to not quite $17,000 a month. It’s $16,900. So, almost $17,000 by the time they’re 80 to spend the same way that they are spending today with $12,000 a month.
Murs Tariq:
To live the same way. And now what’s even more important is how much more pressure has that put on our withdrawals on the portfolio? What’s our net need now?
Taylor Wolverton:
Yeah, so that part comes to about $8,500 a month now is what we’re needing to withdraw from their savings and investment accounts to cover their expenses after their pension and social security is spent.
Murs Tariq:
So, we entered into retirement with about a $4,000 deficit and now we’re talking 8,000 plus. So, quickly, you can see how inflation can snowball on us and we want to make sure that we’re paying attention to that as well as just making sure the plan year-over-year is in line with expectations. And what the software is doing, by the way, is that if there is a withdrawal need, if there’s a deficit, it’s automatically taking it out of assets. So, it is taking it out and spending it. So, our assets at age 69, they were how much and what are they now at age 80?
Taylor Wolverton:
So, starting out at age 69, we had over two and a half million. And then, looking down later at age 80, it’s closer to the total is 3.2 million. So, the distribution’s… Go ahead.
Radon Stancil:
I just wanted to interject here real quick because up to this point, you might’ve just started feeling stressed. I was feeling stressed as you talk about this, right? Because now, all of a sudden we’re talking about a deficit, we’re talking about inflation. And that’s, I think, what happens is a lot of people get really nervous and we’re sitting here having an episode talking about savvy savers should spend more. And it sounded like, wait a minute, I am exactly where I was in the beginning. I should not spend any more money. And so, I think what’s important here to take away from all these numbers that we went through is that, yes, you’ve had inflation. Yes, you’re needing to spend more, but with a conservative rate of return on the right column, you’ve got more money now at age 80 than you did at 69, right?
So, we are able to take care of all of the debt load without having to worry about this idea of that we’re going to run out of money. So, I know you’re going to go further down to 90, but I just wanted to… Because I was starting to feel stress right there. Like, okay, wait a minute, now I’m spending 8,000 out of my savings. We’re talking about why you should spend more. So, I want to bring it back to, yes, we are keeping up with inflation, but we have more money in our savings.
Murs Tariq:
Yep. So, we’re at that 3.2, and we do this all the time too. When we’re in the meetings, we’re showing the client this particular page and they’re in shock. “How is it possible that I’m drawing down my assets and my assets continue to grow in retirement?” Well, it’s just the fact of the idea of if you’ve done a good job of saving, you’ve got a decent bucket of money to work with and you spend within your means, a lot of times it’s a very common thing that we see assets growing in retirement. Which goes back to the whole purpose of this episode is, hey, unless you want to leave all that behind, maybe we should start considering spending a little bit more.
All right, I want to give us one more point of reference and that’s go down 10 more years now, let’s look at their age 90. And just remind us, Taylor, where we started, what 80 looked like and at age 90. What have expenses grown to and what’s our asset base now?
Taylor Wolverton:
Yes, okay. So, again, today at age 69, we’re starting with over two and a half million dollars total in savings and investments. At age 80, we’re looking at 3.2 million. And then, when we come down to age 90, we have close to 2.9 million at that point in time.
Murs Tariq:
Okay. So, at some point, the dollars going out of the account started to reduce our asset, and that is very common. And a lot of times it’s usually around here that the client will joke and say, “Hey, I’m not going to be here at age 90,” or, “Why am I leaving the 2.9 million behind?” Or whatever you want to come up with. And so, that is where we start to say, “Okay. Well, your plan looks fantastic, just the way it’s written right here, and we haven’t even gone through many of the what-ifs yet. The fun what-ifs, right?” We can plan all day for the bad stuff, long-term care and life insurances and all that stuff. But retirement, we work so hard to get to it. We should also talk about the fun stuff, the bucket list items that you’ve about, the big trips or whatever it is.
So, in this case, the client, the sample client, like Taylor said, they have a small travel budget built in annually, but what we do know is that they do have a couple bucket list trips that they do want to take and they’re nervous about it. And so, our job is to bring comfort to the idea of, “Hey, maybe one or two or three years or maybe every now and then we do take a larger withdrawal to satisfy that bucket list trip that we’ve been putting off for so long.” Again, the whole point of saving and planning for retirement is to actually enjoy it. So, if you need to spend a little bit more to enjoy it, why not? You’ve worked hard for it.
So, in their case, they wanted to immediately after they retired, they wanted to spend about $30,000 on a rather large trip that they have somewhat planned out. They’ve been talking about it for years, work never allowed them to take that kind of time off and spend that kind of money. And so, here we are now we’re sitting with them and they say, “We’ve been thinking about this, it’s going to cost 30,000. Can we financially do this? We need you to tell us that it’s okay for us to go and do this.”
So, Taylor, let’s again remind them… What Taylor’s going to do, and she does this in the meetings every day, is she will show them, she’ll add in that line item of this trip and think about whatever big trip you’re thinking about right now and what that’s going to cost. She’ll add it in and say, “Travel for,” in this case, “2024, and it’s going to cost $30,000 all out the door in this calendar year.” And what will show the client is, “Okay, remember at age 90 without doing this trip, you had X.” Remind us, Taylor at age 90, what do they have?
Taylor Wolverton:
2.9 million.
Murs Tariq:
2.9 million? I’m not good at remembering all the numbers.
Taylor Wolverton:
Me either.
Murs Tariq:
We’ve thrown a lot at you here as you’re listening, Radon will remind you about the blog as well. So, 2.9 million at age 90, and all she’s going to do is add in that $30,000 outlay this year. And so, we’ll show them. And when we go and look, the first thing we’ll say is that, “Yeah, this year was more expensive. Your expenses went up for this one particular thing we’re trying to do.” And the long-term impact, that’s what we want to show people is what is the long-term impact of one large withdrawal, especially at the beginning of retirement? And so, we’ll go back down to age 90 and show them that number, and what does it go to?
Taylor Wolverton:
So, now, with the additional $30,000 added in for the year 2024 for that one trip at age 90, that brings us to a total for savings and investments is $2,780,000 by that point in time.
Murs Tariq:
Okay. 2,780,000. So, about $120,000 difference over a almost 20-year period of time. So, now you can ask yourself, “It costs me 30 upfront to do this. In the long run, over the next 20 years, the long-term impact is $120,000, but I got to do something I’ve been wanting to do for years and I’ve got to check that off my list. Is that worth it to me?”
Radon Stancil:
Yeah, I was just going to say, I think I talked about this last time, but just to remind you, we talk about this financial plan being a GPS system. And just to remind you of the illustration, as we sit right here, sometimes we’re going on a trip, we look at the GPS. The GPS says we’re going to get there at 2:30, and we go, “Great.” Well, then we’re riding along and one of us says, “Hey, I want to stop at the Starbucks or I want to stop at the get some food or I want to do that.” And we put it into the GPS and then it comes up with the calculation and it says, “Hey, if you do this stop, you’re going to get there at 3:15.” So, we have a conversation and we say, “Are we okay getting there at 3:15?” And everybody goes, “Yeah, 3:15 is fine.” So, we go and make the stop because we want to get there.
That’s exactly what we’re doing here is we’re saying, “Hey, okay, we had 2.9 million.” And we’re saying, “Hey, but you know what though? We’d really like to go on this trip and have an experience. And in order to do that, we’re going to end up with 2.7 million. Are we okay spending that in order to get that trip and have that memory?” “Yeah, I’m good with that. I mean, kids are going to be fine with 2.7 million, 2 point whatever it was, million. No big deal. Let’s do it.”
So, don’t look at it like, “Oh my gosh, that cost $130,000 over 20 years.” It costs you 30,000 now. When you put inflation on it does all that stuff and it looks bad in a way, but in a way it’s like, I still got 2.7 million. So, you have a conversation and you go, “Are we willing to do that?” And that’s this idea behind that. I know we’ve gone a little bit long here on our normal. Can we do one more, Taylor?
Taylor Wolverton:
Yeah.
Radon Stancil:
And let’s say that they love the trip in 2024 and they say, “You know what? We’re going to do one more in two years.” So, in 2026, they’re going to do another one and it’s going to cost them this time, 35,000. Make it 35,000, we’re going to upgrade.
Taylor Wolverton:
Okay, so I’m just adding in another trip, $35,000 for the year 2026 in addition to the $30,000 that they’re going to spend on traveling this year in 2024. So, before at age 90 with just a $30,000 trip for 2024, we were over 2.7 million. And now, with the additional $35,000 trip in the year 2026 at the same year, age 90, now our total savings and investments is over 2.6 million.
Murs Tariq:
Yeah. So, again, I think you’re getting the theme of the whole purpose of this episode is while it may seem pricey, and it may seem expensive upfront, and it does have impacts to the plan, right? You’re spending dollars, but at the end of the day, you worked hard to get to where you are, to where retirement is a place that you’re not really stressed out about, you’re not worried about. Yes, withdrawing, is that different? Realizing you’re not having a paycheck or a salary coming in anymore, does it feel different? That’s something you get used to. We see our clients do it every day.
What we want you to start thinking about more and more, especially if you’re still working, is what am I working towards in retirement and what type of bucket list items have I been putting off? The way I say it is that the sooner we can plan for it, the sooner we understand the numbers around it, the sooner we can make it a reality. So, I encourage you to start thinking about those, so that we can make it a reality and you actually enjoy it rather than just giving it all away.
Radon Stancil:
And don’t get caught up in the numbers. Don’t be like, “I never would spend $12,000 a month,” or, “I don’t have $2.5 million.” Your numbers are your numbers. You may say, “I only spend $7,000 and I’ve only got a million and a half,” and everything still works very good for your situation. Don’t get caught up in that. The relationship between what I’m spending and what I have, completely different for different people. We wanted to give an example. We run into this all the time, regardless of those two numbers. Obviously, if you’re spending too much, then that’s a whole different story. That’s just not our typical client. Our typical client is spending pretty frugal compared to what they made and they’ve done a good job saving. So, keep that in mind.
Murs mentioned it earlier. We did go through a bunch of numbers. Don’t worry about that. All you want to do, if you want to see all the numbers, go to our blog page, pomwealth.net. Go to the blog page, we have a whole article written on this with all the numbers there. You can see it clearly, read it through, it’ll help you identify whether or not you want to have any questions. If you have questions and you’d like to see your numbers, whether you already are a client or you’re maybe not a client, but you want to see those numbers, just go to our website, top right-hand corner, click on schedule call. Our schedule will come up. We’ll be able to hop on a call. We’ll do a little bit of a question and answer. Then, we can build out the plan and show you exactly what that looks like for you.
But thank you very much, Taylor. We appreciate all of the numbers and all of the helping us there, and we will talk to everyone next Monday.