We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for June 3, 2024
Annuitization Versus Deferred Annuities in Retirement
Radon and Murs discuss the concept of annuitization and immediate annuities versus deferred annuities. Annuities can come from different sources, such as insurance companies or municipal pensions. Listen in to learn how immediate annuities work, their pros and cons, and risks such as the potential loss of the principal if the annuitant dies early. You will also learn how…
Annuitization Versus Deferred Annuities in Retirement
Learn how deferred annuities work, the fixed type of deferred annuities, and why they make more sense for retirement planning than immediate annuities.
When planning for retirement, many clients ask us about annuitization and how it compares to deferred annuities. This topic often causes confusion, so we aim to clarify the differences and benefits of each option to help you make informed decisions about your retirement income.
Types of Annuities
There are two primary types of annuities:
Immediate Annuity: You invest a lump sum of money and start receiving payments almost immediately.
Deferred Annuity: You invest over time, allowing your money to grow before you start receiving payments.
What is Annuitization?
Annuitization means converting your investment into a stream of income. This process allows you to secure a reliable income during retirement. However, it’s important to understand the specifics:
Lump Sum to Income: You provide a lump sum to an insurance company, which then guarantees a regular payment for life.
Risk and Reward: If you live longer, you benefit from a steady income. If not, the remaining funds typically do not go to your beneficiaries.
Example Scenario:
You invest $100,000 into an immediate annuity.
The insurance company calculates that you will receive $500 monthly for the rest of your life.
If you live a long time, this can be advantageous. If not, the insurance company retains the remaining funds.
Adding Protections to Your Annuity
To mitigate the risk of losing your investment early, you can add protections:
Joint Annuitization: Adding a spouse as a beneficiary ensures they continue to receive payments after your death, albeit at a reduced rate.
Period Certain: Guarantees payments for a specific period, even if you pass away early, ensuring your beneficiaries receive the income.
Immediate Annuities: Considerations
Immediate annuities can provide peace of mind with guaranteed income but may not always be the best financial choice. For instance, one client needed to live until 102 to break even on their investment. While it provides security, it might not offer the best return on your money.
Security vs. Growth:
Peace of Mind: Immediate annuities offer the security of a fixed income, which can be comforting for those worried about outliving their savings.
Limited Growth: However, the lack of growth potential means that your money doesn’t work as hard for you. For those who have saved diligently and are financially secure, this might not be the most efficient use of their funds.
Deferred Annuities: A Balanced Approach
Deferred annuities offer more flexibility and growth potential compared to immediate annuities, making them suitable for good savers who want to maximize their retirement funds. They come in two forms:
Fixed Deferred Annuities: Provide a safe place to grow your money with predictable returns.
Variable Deferred Annuities: Offer the potential for higher returns but come with more risk.
Fixed Deferred Annuities:
Predictable Returns: These annuities grow at a fixed rate, providing stability and peace of mind. They are ideal for conservative investors who want to avoid market volatility.
Indexed Growth: Some fixed deferred annuities are linked to an index like the S&P 500. This allows you to benefit from market growth without exposing your principal to risk. For example, if the S&P 500 performs well, your annuity’s value increases, but if the market underperforms, your principal remains protected.
Variable Deferred Annuities:
Higher Potential Returns: These annuities invest in a variety of sub-accounts, similar to mutual funds. While they offer the potential for higher returns, they also come with increased risk. Your returns will vary based on the performance of the underlying investments.
Making the Right Choice
Choosing between annuitization and deferred annuities depends on your unique financial situation and retirement goals. Here are some key considerations:
Financial Goals: What are your primary financial goals for retirement? Are you looking for security and a guaranteed income, or are you willing to take on some risk for the potential of higher returns?
Risk Tolerance: How comfortable are you with market volatility? Fixed deferred annuities offer stability, while variable deferred annuities come with more risk but also higher potential rewards.
Life Expectancy: How long do you expect to live? This can impact whether an immediate annuity makes sense for you. If longevity runs in your family, an immediate annuity might be more attractive.
We recommend discussing your options with a financial advisor to determine the best strategy for you. Our team is here to help you navigate these decisions and find the right solution for your retirement plan.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for May 28, 2024
What’s The Difference Between FDIC and SIPC in Retirement?
Radon and Murs discuss the difference between FDIC (Federal Deposit Insurance Corporation) insurance and SIPC (Securities Investor Protection Corporation) insurance. Both FDIC and SIPC offer protection of funds held in accounts at financial institutions like Charles Schwab or Fidelity.
What’s The Difference Between FDIC and SIPC in Retirement?
We aim to address topics on the Secure Your Retirement podcast that people have asked us about. Recently, we’ve been receiving questions about whether the funds in Schwab, Fidelity, etc., are insured.Some accounts, if they are bank-related, are ……
We aim to address topics on the Secure Your Retirement podcast that people have asked us about. Recently, we’ve been receiving questions about whether the funds in Schwab, Fidelity, etc., are insured.
Some accounts, if they are bank-related, are FDIC-insured.
If the account is not bank-related, it will not be FDIC-insured. We need to really think of these as two separate entities:
In most cases, your will have money in both of these types of accounts (realizing there are other options outside of these two as well). Both are fundamental in your retirement planning but are also very different.
What is FDIC and Why Was It Put in Place?
The Federal Deposit Insurance Corporation (FDIC) made headlines last year when regional banks like Silicon Valley Bank (SVB) started having issues. Businesses and individuals had a lot of money in SVB, and this sparked a relevant interest in the FDIC.
In the 1920s and 1930s, bank failures led to people losing money and savings.
In response, the government started the FDIC to protect the public. If the bank does something wrong or there are other issues, people would be covered up to a certain dollar amount by the FDIC.
The FDIC covers up to $250,000 per person. If you have $250,000 in your own savings account, you can be confident that up to this amount is covered by the government.
During the SVB debacle, FDIC was extended up to $1 million.
Why?
The FDIC is a way to make consumers feel more comfortable with the banking system. With account titling, you can cover a lot of your assets with FDIC.
You can receive coverage for (talk to your banker to do this properly) :
Different account registrations can help you cover your money in multiple accounts with FDIC. If you have bank accounts with ten different banks, each account can be covered by FDIC. If you have more than $250,000 at one bank, work with a banker to see options to extend FDIC coverage.
When you work with a bank for your investment, the investments and securities do not fall within the FDIC. Cash in the bank falls under FDIC, but investments do not.
Investments have risks, and since this is the nature of investments, the government does not cover these funds. Enter SIPC.
What is SIPC?
SIPC stands for Securities Investor Protection Corporation. If you’re a securities company, such as Schwab or Fidelity, you have SIPC protection.
Why?
SIPC protects you from a different side of things compared to FDIC. Custodians, such as Schwab and Fidelity, allow you to invest money in stocks, mutual funds and so on, but you’re not invested in these companies.
Instead, you invest through the custodian. You can move all your investments to another custodian whenever you like.
If you want to see your stock in one of these custodian accounts, and the custodian cannot find the stock or the investment you made, this is where SIPC comes in. SIPC protects against these types of clerical errors.
You can lose 90% of your investment in a stock because the company is going bankrupt, and there is no insurance for this risk. However, if the investment is lost because of a custodian error, SIPC will offer up to $500,000 per person in protection.
If Schwab went out of business, SIPC would put forth the money to help you find your:
In the market, you can lose your money. A custodian’s purpose to provide a place to park your investments like a parking garage’s purpose is to give you a place to park your car. If those investments are somehow lost, SIPC does offer some protection to help find your “lost car”.
Financial planning with the right strategies in place provides you with peace of mind that your money and investments have the maximum amount of protection possible.
Do you have questions about your financial plan or about FDIC and SIPC?
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for May 20, 2024
Turning 65 in Retirement – What To Do for Medicare
Radon, Murs, and Shawn discuss Medicare planning for people nearing the age of 65. Shawn explains the timelines and eligibility criteria for the Initial Enrollment Period (IEP), Special Enrollment Period (SEP), and General Enrollment Period (GEP).
Turning 65 in Retirement – What To Do for Medicare
If you’re ready for Medicare and turning 65, there are a lot of complex topics that you must think about. In our latest episode of Secure Your Retirement, we had our very own Shawn Southard back on the show to help folks reaching the age of 65.We’re going to walk you through the entire process…
If you’re ready for Medicare and turning 65, there are a lot of complex topics that you must think about. In our latest episode of Secure Your Retirement, we had our very own Shawn Southard back on the show to help folks reaching the age of 65.
You’ll be able to go on Medicare at 65, but it’s overwhelming looking through plans and options.
We’re going to walk you through the entire process to help you start to understand Medicare, how it fits into your retirement planning, and the steps you can take to make the whole process easier on you.
What is the Initial Enrollment Period (IEP)?
IEP has a seven-month window, starting three months before turning 65, where you can enroll in a Medicare plan. You can apply for Part A, which is for in-patient care and Part B, which is for doctor visits and outpatient care.
Special Enrollment Period (SEP)
An SEP is becoming more common as more people are working past the age of 65. While you’re still working, you’ll forget about Medicare when turning 65 and remain on your health insurance plan until you retire.
Once you do retire, the IEP is likely to go by, so you’ll fall within the SEP.
You can fall into the SEP for a few reasons, but the most common is that you worked past your IEP and now need coverage because you’re off your group insurance plan.
Note: You have eight months from the time you retire to enroll in a plan within the SEP, or you will face penalties.
General Enrollment Period (GEP)
Imagine that you go to Cancun in your mind and aren’t paying attention to the IEP or SEP. You can still get into Medicare during the GEP, which is January 1st – March 31st each year. You can enroll in Parts A and B at this time.
Medicare also changed the rules a bit, and if you sign up in January, you’ll begin receiving your benefits on February 1st, not July 1st, which used to be the case.
Depending on when your IEP and SEP passed and your situation, you may receive a late enrollment penalty. Shawn works with folks to help navigate these situations on an individual basis.
Scenario: Still Working, turning 65, and Still Enrolled with My Employer’s Plan
If you’re approaching 65 and plan on working a few more years, you need to make sure that your company plan has 20 or more people actually enrolled in the plan. It’s not enough for 20 people to be working at the company – they need to be enrolled in the health plan.
In this case, Medicare will provide an exception and won’t need to do anything with Medicare.
Employees of employers with a health plan that has 19 enrollees or less will need to enroll with Medicare, even if they plan on continuing working past 65.
Scenario: Retired But with Health Coverage
In some cases, a person will retire before 65 and still receive benefits from their employer. For example, state employees of North Carolina can still receive their benefits until 65, but these benefits are considered secondary when you hit 65.
You will need to enroll in Part A and B of Medicare at 65, even if you want to keep your former employer’s health insurance.
Scenario: I’m Still Working, Approaching 65, But I Receive Social Security Retirement Benefits Already
If you’ve been receiving Social Security or Railroad retirement benefits for at least four months before you reach 65, you’ll automatically be enrolled in Medicare Part A and B when you hit 65.
You will want to send the coverage back to Medicare when you receive your Medicare card.
Why?
Medigap plans have no medical underwriting for the first six months of your Medicare coverage, and you’ll pass by the six-month period because of the automatic enrollment. Even if your coverage starts for one day, the time for Medigap plans will start ticking down.
How Do You Enroll in Medicare?
If you’re reading this and thinking, “I need to enroll,” you have a few ways to do this. An easy way to enroll is to:
You can also go down to any Social Security Administration office and enroll in Medicare in person.
For many people, the ideal solution is to go through the online portal.
What Forms and Documents Do I Need for This to Go Smoothly?
You should have a few things available:
Social Security number
W-2s
Proof of citizenship (Birth certificate, passport, etc.)
CMS Form (if you work past 65)
Shawn can help you obtain all of the forms you need when you work with him.
Penalties for Missing the Enrollment Period
If you miss the enrollment period, you will be penalized. Penalties cannot be undone, so they’re monthly, lifetime mistakes. For example, if you miss Part B coverage, you’ll pay 10% on top of the premium for every 12 months that you miss it.
You’ll be paying 10% more monthly for the rest of your life.
Let’s say that you didn’t enroll until 60 months after your enrollment period. This means that you’ll be paying an additional 50% on top of your premiums forever.
The Part D (for drug plans) late enrollment penalty is 1% for every month that you weren’t enrolled in one for the rest of your life. Shawn knows a client that didn’t enroll in a prescription drug plan at 65 because he didn’t need medication at the time. When he turned 70, he needed medication, and he now pays a 60% penalty on top of the normal plan price.
Anyone listening to this will want to avoid being penalized because it will impact you for the rest of your life.
You can handle Medicare on your own, but if you work with Peace of Mind Wealth Management to secure your retirement, Shawn is our Healthcare Professional Specializing in Medicare and is available to help all our clients.
Working With Shawn Using the K.I.S.S. Acronym
Shawn follows the Keep it Simple Shawn mindset, and he aims to provide a calm approach throughout the process. He will work with you wherever you are in the Medicare process, discuss your goals, and help you find the coverage and plan that is best for you.
He uses a flowchart to show people the:
Foundations of Medicare
Options of Medicare
You’ll also learn about Medicare plans, Medigap, payments, Income-related Monthly Adjustment Amount (IRMAA) and other aspects of Medicare. Shawn will also hop on calls with your employer to make the process as seamless as possible.
If you do want to talk to Shawn about Medicare and begin working with him, feel free to reach him at our office at (919) 787-8866 or email him at shawn@pomwealth.net.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for May 13, 2024
Radon and Murs speak with Lynne Moore about the concept of aging in place, comparing it to continuous care retirement communities (CCRCs). Lynn has an extensive background in geriatrics and now works with ThriveMore, an organization specializing in helping people age in place.
On the Secure Your Retirement podcast, we have a great episode on Aging Gracefully at home with Lynne Moore. Lynne works at ThriveMore, where she uses her skills as a geriatric nurse and as a former director of a nursing home to help people in long-term care facilities…
On the Secure Your Retirement podcast, we have a great episode on Aging Gracefully at home with Lynne Moore. Lynne works at ThriveMore, where she uses her skills as a geriatric nurse and as a former director of a nursing home to help people in long-term care facilities.
During Covid, she learned a lot about bringing care into an independent living situation and how easy this was achieved, even with all of the regulations in place. Working with people in independent settings was much easier because there were fewer regulations to worry about.
Her experience led her to become a geriatric care manager, working with people privately in their homes and bringing them the care necessary. Ultimately, this all led to a position at ThriveMore.
Continuing Care at Home vs in a Community
ThriveMore owns four CCRCs and is building two additional facilities, so the company is not against a CCRC. If you’re a person who wants to start aging gracefully in the comfort of your home, over 96% of people can achieve this goal.
The difference?
You retain your home
You maintain your home
Services are brought into the home
Instead of selling your home to pay for entry into a CCRC, you’ll reside in your home that you know and love.
What Services are Brought into the Home?
From the very beginning, an aging-in-place assessment is performed to identify things such as, do you need a first-floor bedroom or do you need to widen the doorways?
When people enter into the ThriveMore program, they must not need care at the moment. ThriveMore works as a sort of insurance and care is brought in over time as necessary.
We bring in the support and care people need in their homes before they need them and add more as a person’s needs evolve. Short-term or long-term care is brought in, and the long-term care insurance is underwriting the care.
Is medical underwriting required?
Entering into a program like this will require:
5 years of medical to ensure that the applicant is “healthy.” What this means is that a person does not have a diagnosed progressive declining disorder, such as Parkinsons, ALS, Lupus and things of that nature. These disorders lead to extensive time in a long-term care community where this type of program would not be beneficial
Entering into a membership
Supplying financial information
How the Program is Modeled
You can think of the ThriveMore program as an insurance plan with multiple levels of coverage. Part of the cost is based on an entrance fee and then there’s a monthly fee attached to it.
The buy-in fee is determined by the person’s age. Often, people buy in when they’re younger because it’s more affordable than if they’re closer to needing care.
Members pay a pre-paid membership fee, and the monthly fee is less because you’re not paying for a fancy facility like in a CCRC. When compared to a CCRC, you’ll pay much lower fees.
Through ThriveMore, a 75-year-old would:
Have $385 per day in coverage max
Have $192.50 per day and the person’s long-term care plan
Entering into a program like this would cost around $50,000 for the entry fee and $500 per month in membership fees for a 75-year-old.
Compare this figure to a CCRC, and you’ll notice that many CCRCs have a $300,000 – $500,000 buy-in plus $2,000 – $8,000+ per month.
Homeowners are still maintaining the cost of their homes, so they can save a lot of money.
A review is done when meeting with potential customers, where the team will review any insurance plans the person may have and determine the level of coverage. The highest level of coverage for someone who is 75 will be somewhere around $70,000 buy-in and $700 in monthly fees.
These fees will provide $385 in coverage per day.
Entering the program requires you to be at least 62, and at this time, the buy-in can be as low as $30,000. You can have a health crisis that happens early, and if you’re not a member, you cannot join in.
Members who develop a diagnosis cannot be kicked out of the program, even if they’re not in their 70s. For this reason, it’s better to buy in when you’re younger, and it’s cheaper because you have the security of being a member.
You never plan on having a stroke or developing Parkinson’s, so buying in early can save you a lot of money and lock in benefits that you may miss if you did have a diagnosis prior to applying.
Plus, you benefit from:
Recommendations for aging gracefully
Help outfitting your home for older age
ThriveMore engages with you from the moment you become a member, so you have professionals who will help you along the way.
Monthly fee maximums are inflation-related, so they will rise every year. The fee is calculated by analyzing nursing facilities in the area and understanding the average number each year.
So, yes, your monthly fee can rise annually, but it will not be more than the average you’ll pay at a skilled nursing facility.
Staying Busy and Interactive
Social engagement and keeping busy are crucial to staying healthy in the latter years of life. While an at-home program doesn’t provide many of the social aspects of a CCRC, it does allow friends and family to come to your home and spend time with you.
Retirement planning in a CCRC is different from a solution like ThriveMore because people can remain in their neighborhoods and enjoy the social life that they already have.
From Lynne’s experience, seniors are always very busy when they’re retired.
However, there are opportunities to get together with members and get out in the community.
ThriveMore is a program for people who want to stay in their homes, so they already have a social life and want to remain in place. Extroverts may prefer to be in a traditional CCRC, while introverts prefer something like ThriveMore.
Quality Care Vetting
ThriveMore’s care vetting strives to offer excellent quality. Partnerships with home care providers in the area allow members to have access to the exceptional care they need while remaining in the home they know and love.
Lynne’s background allows her to assess healthcare partners to know if they offer excellent care or not.
If you want to learn more about ThriveMore, you can visit the official website.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for May 6, 2024
In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Nick discuss downsizing in retirement. Scenarios such as lifestyle preferences and financial needs are what make downsizing a consideration for retirees.
Listen in to learn how we use practical scenarios to help clients…
Nick Hymanson, CFP® from our office, joined us this week on our latest podcast, where we talked about something many people overlook in their retirement planning: downsizing.Nick often meets with clients to review their retirement focused financial plan, making sure…
Nick Hymanson, CFP® from our office, joined us this week on our latest podcast, where we talked about something many people overlook in their retirement planning: downsizing.
Nick often meets with clients to review their retirement focused financial plan, making sure everything is up to date and the clients are happy. Sometimes, there are needed adjustments that are identified, and Nick works with clients to address these as well.
And one of these adjustments relates to downsizing in retirement.
We’ve noticed a common conversation recently where some folks are interested in discussing:
Downsizing into a smaller home
Downsizing into a home that’s easier for them to get around in
Let’s dive deeper into this topic and look at a few scenarios.
Scenario 1: You’ve Been in Your House for 30 or 40 Years
Let’s say that you have been in your home for 30 or 40 years. Maybe you raised kids in your home, and it was set up for the lifestyle you had 20 – 30 years ago. Unfortunately, the house isn’t set up for where you may be now, or in 10 years.
Often, retirees are in a much larger house than they need for the lifestyle they have now, and it would be nice for the main bedroom to be on the first floor.
Pros and Cons
In addition to wanting your bedroom on the first floor, you may want:
Fewer stairs
A smaller space that is easier to maintain
Downsizing may mean worrying less (or not at all) about constant tasks like yard work, stairs, and cleaning additional bathrooms.
In the Raleigh-Durham area, housing prices have been going up for quite some time. People are concerned about going into a smaller home that may be even more expensive than the home they are in currently. From a financial perspective, moving to a new home may be an even exchange but the person may lose some square footage and land.
Depending on the community, landscaping, and some outside work that you may not be able to do on your own may be included.
Scenario 2: Cash Flow Scenario
You’re in a beautiful home, but you want to reduce the mortgage and the strain it may have on your financial plan. From a cash flow perspective, downsizing may be a better option and provide peace of mind for the next 10 – 20 years.
If your house has appreciated in value and you don’t have much to pay off on the mortgage, you might find yourself in a scenario where you can sell your home and buy another one in cash.
A $1,000 – $3,000 mortgage can have a drastic impact on your financials.
When we look at a retirement plan, we look at a person’s income and expenses to see where they may be having stress in their finances. For some people, downsizing can either:
Reduce the mortgage
Eliminate it
If you eliminate the mortgage, you may have the additional cash to travel or have less of a strain on your finances in retirement.
We talk to clients from the beginning about their homes and if it makes sense to downsize.
Planning from the start to downsize can offer a realistic view of what freedom selling the house may offer. Of course, not everyone will need to sell their home or have a desire to do so.
If selling does make more sense from a cash flow or mobility standpoint, then it is something that is worth discussing with a financial advisor.
Moving to a CCRC is a conversation that we have, too. The CCRC allows you to receive community and care throughout the various stages of retirement, which is also a nice perk.
What Happens in Our Strategy Meeting
We have software that allows us to plug in the numbers and look at what your financial decisions today will mean in the future. Let’s assume that your target date for retirement is five years from now.
In five years, we can simulate:
What the sale price of your home is likely to be in five years
Tax consequences of selling the home
What it looks like if you use the funds to buy into a CCRC or another home that’s better for your scenario
Our goal is to show you how downsizing in retirement may benefit you. We’re able to see how a lower mortgage (or no mortgage) can benefit your overall cash flow and retirement plan. If you don’t have a $1,000 – $3,000 house payment, it can make a world of difference in your expenses.
Visualizing all the cash flows through the software helps you feel more confident in your decision, which may or may not be to sell your home.
We can look at this scenario for you if you have two homes and want to sell one in the future or even if you want to make a large purchase in the future. Seeing the figures of your retirement and how the decisions you make today can shape your retirement is empowering.
If you need help to secure your retirement, are considering downsizing and want to see how it may benefit you or want to know if you can really afford that once-in-a-lifetime trip, we’re here to have that conversation with you.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for April 29, 2024
Why Savvy Savers Should Spend More in Retirement – Part 2
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.
Why Savvy Savers Should Spend More in Retirement – Part 2
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.
If you missed Part 1 of this series, we recommend that you either read through our blog post here or listen to the podcast here. Continuing on with Part 2 of why savvy spenders should spend more in retirement, we decided to bring in our own Taylor Wolverton, CFP ®, Enrolled Agent, on the discussion.
Foundation of Why Savvy Savers Should Spend More in Retirement
Oftentimes, we have conversations with clients who have more money than they’ll need in retirement. However, at times the fear of running out of money is so great that even when it’s a necessity, they hesitate to spend. Because of this, many will pass on a multimillion-dollar legacy to their beneficiaries at death, whether that is their true intention or not.
Let’s look at some examples of this concept.
Husband and Wife, Both 69 Years Old
Our first example to illustrate the idea is a husband and wife, both currently age 69, with the following details:
Both fully retired- not currently receiving wages or employment income
Husband receives $4,000 a month from Social Security
In total, the couple has $2,564,000 between cash savings, IRAs, Roth IRAs, and stock along with steady sources of income from their pension and social security benefits.
Let’s look at their spending.
Spending
This couple spends about $12,000 per month to cover their expenses. This does include $6,000 to $7,000 per year that they use for travel. In our long-term projections of this scenario, we assume inflation on their expenses at a rate of 3% per year for the duration of their retirement.
Note: When we meet with the client, we try to gather as much information as possible to have an awareness of relevant figures, but there are times when someone forgets about an account or a small pension, so it’s something that we continuously review and tweak as necessary over time.
Assumptions
As previously mentioned, we assume inflation will rise 3% per year. To stress test a retirement scenario, we also assume that the invested assets will have a 4% to 5% return each year which we believe is conservative. We assume the social security and pension amounts stay the exact same with no cost-of-living adjustments over time.
What the Couple’s Retirement Page Looks Like
Clients of ours receive a one-page retirement summary that outlines income and expenses for the duration of their retirement. For this couple, the page will show the following:
$1,900 per month from the pension
$6,700 per month in combined Social Security benefits
After subtracting an estimated for tax withholdings, net income is $8,400 per month
Based on the couple’s current spending habits, they need $3,600 – $4,000 distributed from their accounts per month to make up for this difference. The couple has over $2.5 million in savings, IRAs, stock, etc., so they have a decent amount of money available to take distributions from.
Both spouses are age 69 today. At this rate of distribution, what will happen by the time they’re 80?
Inflation Calculation
The couple spends $12,000 a month at age 69, and by 80, with a 3% inflation rate, this figure will be $16,900. In just 11 years, additional pressure is put on the savings and investment accounts because the couple needs about $8,500 a month to cover expenses after pension and Social Security.
You can quickly see how inflation will impact your assets.
At age 69, the couple had over $2.5 million in retirement accounts, and by age 80, we project they will have around $3.2 million. If you were feeling stressed up until this point, you’re not alone. But with a conservative 5% annual rate of return, the couple in this example has more in savings and investments at age 80 than when they started at age 69, even when taking regular monthly distributions to cover their expenses.
What about at age 90? In this scenario, the couple is projected to have $2.9 million in savings and investments. Withdrawals started to impact the accounts somewhat, but at age 90, the total value is nowhere near an amount that would cause concern around the ability to maintain the current level of spending.
You can do a lot with $2.9 million and enjoy the money that you worked so hard to accumulate. We know that this couple puts aside $6,000 to $7,000 to travel, but they do have a few bucket list trips that they would love to take.
$30,000 Trip Added In
The couple is nervous about taking these bucket list trips because they will have to take a larger withdrawal. For a few years, the couple has wanted to take a $30,000 trip that they couldn’t because of work and other obligations.
We always sit down to crunch the numbers with our clients because retirement spending is a major source of anxiety for a lot of retirees.
What we show the client is something like this:
Remember, at age 90, without taking this trip, you’ll have $2.9 million.
Let’s add in the $30,000 expense at age 69. What’s the long-term impact at age 90? The couple has $2,780,000 instead of $2.9 million.
Over 20 years, they may lose about $120,000, but they were able to tick something off their bucket list.
Will the trip and memories be worth the money? For most people, the answer is a resounding “yes.”
$35,000 Trip Added in for 2026
Perhaps the couple was so excited about their first trip and didn’t mind the retirement spending, so they added in an additional trip of $35,000. By age 90, with the $30,000 and $35,000 trip taken, the couple will still have $2.6 million in savings and investments.
Passing $2.6 million to your beneficiaries is always going to be a nice gift.
Withdrawing money and adding in these larger expenses into your retirement planning really comes down to “what are you working for in retirement?” The sooner we can add these figures into your plan, the faster we can secure your retirement.
We encourage you to start looking at the things that you really want to do in retirement and begin planning them now.
It doesn’t matter if you would never spend $30,000 on a trip or don’t have $2.5 million in retirement accounts.
Spending and retirement accounts vary drastically between couples. If you’re not spending more than you have, there’s always a good chance that you can start checking off some of the items on your bucket list and still have more than enough money for yourself well into retirement.
We can run these numbers for you so that you can feel confident about spending more money and making memories for yourself while in retirement.
If you have any questions or would like us to run the numbers for you, please feel free to reach out to us.
You’ve saved well enough to secure and enjoy your retirement. Today, you’re going to hear two financial advisors (us) say something that you never thought you would hear: spend more in retirement.
We see it all the time – people are so used to saving that spending money is difficult.
People have developed a mindset where spending money in retirement becomes a moment of anxiety. Many of our clients leave behind significant inheritances. We encourage them, with good and thoughtful planning, to spend some of that money to:
Make memories
Experience new things
You can spend a little more and still leave money behind for the next generation.
Why Savvy Savers Should Spend More in Retirement
A long time ago, we had a client call us. She had about $2.5 million in retirement and at the time, she had some water damage in the kitchen. She was living on only her Social Security amount and was in her 70s.
She said that insurance would cover the replacement of her linoleum floors, and she asked if she had enough money to upgrade to hardwood floors for about $15,000. We knew that with 100% certainty that she could upgrade, but she was so scared and reluctant to use any of her $2.5 million, she never did.
She left behind a few million dollars to her children and grandchildren, but she never spent her money on herself. Perhaps she would have enjoyed life a little more while she was here by doing something like buying those hardwood floors for $15,000.
The Psychology of Savings
You want to save for retirement and get to a place where you don’t need to worry about having enough money. From a young age, you decide to save for the future, and you put away as much money as you can to enjoy it later.
Everything you do in life is for your family and future, whether it’s saving for a house, putting food on the table, or putting money away for retirement.
You build a habit of saving over the course of decades, and then what happens? It becomes an ingrained habit that can be hard to break. People become extremely frugal, and it’s difficult to spend your money when you reach retirement age.
There’s also a factor of going from accumulation mode to retirement, so you’re taking money out of your retirement and no longer earning a paycheck, which is scary change for a lot of people.
Shaping Your Mind for Retirement
Five or ten years from retirement, when you know you’re on the right track to secure your retirement, it’s time to start switching your mindset. You want to think about:
What you’ll do in retirement
What big travel or experience goals you have
How you’ll spend time with family
Whether you want to own a second home
When we’re working, we tend to neglect some things in life, but when you finally hit the retirement milestone, you deserve to make the most out of your time.
We always ask our clients what they’re going to do when they’re on pace to reach their goal, and they’ll often say:
We’re too busy to think about that
We’ll figure it out when we get there
If you start making goals for what you’ll do in retirement, you can start allotting money to it. Good saving habits help to reach big goals in retirement, but you need to break that “saving only” habit to some extent.
Things to Think About When You Hit Retirement
What are the things you would like to do in retirement? A few questions we like to ask are:
Where would you like to travel to in retirement? How would you like to travel?
Do you want to do any major house renovations?
Do you want to focus on your health and wellness? Ex: hire a personal trainer?
You can also create experiences with your family. For example, we have one client who took their entire family on a cruise for a week. While the person spent a little money on the experience, they created a memory that will last a lifetime.
We’re not saying go out and spend 75% of your retirement, but you can enjoy the money you worked to save and still be confident that you have planned well to secure your retirement.
What You Need to Think About to Spend Your Money Smartly
We don’t want you to go out and spend all your money. What we would like to do is have our clients get these goals in place so that we can use financial planning to help them reach their goals.
If you think about your goals ahead of time, we can:
Plan for these costs
Allot enough money for these expenses
Imagine a $35,000 trip that you want to go on. We can add the expense to your retirement plan and see its true impact.
When we understand the numbers, it makes it much more comfortable for clients to spend some money in retirement because they see the true impact of their spending.
One story that we love to share is of a client who wanted to sell their house, buy an RV, and travel the US for 10 years.
We told them to provide the details and let us run the numbers. The clients came back with data on the cost of the RV, the sale price of the house, expenses, and everything else you could imagine.
They have been happily traveling in their RV for over 10 years now.
We sat down with them last week, and they plan to keep traveling for the next 5 or so years. Next week, we’ll run through case studies to show you the numbers, examples, and “what-ifs” for this type of retirement goal.
A financial plan is like a GPS to help you reach your retirement destination. If your destination changes, the GPS can reroute you to get you where you want to be. Proper financial planning can help you safely reach your retirement destination while still making pit stops along the way.
If you want to learn more about planning for retirement and spending more money, please feel free to reach out to us.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for April 22, 2024
In this episode of the Secure Your Retirement Podcast, Radon and Murs discuss the importance of spending more in retirement. The savings habits we build in our working years can unintentionally lead to a fear of spending money to enjoy life in retirement.
Learn how to shift your mindset from fear of spending and start building good habits that will lead to a successful retirement. You will also learn about the experiences and things you can spend money on, plus the importance of planning ahead of your retirement.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for April 15, 2024
Do You Have All Your Eggs In One Basket in Retirement?
In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the meaning of portfolio diversification and why you shouldn’t put all your eggs in one basket. True portfolio diversification means spreading your money across multiple layers of different options. Listen in to learn about the four major strategies we use to significantly diversify investment portfolios for our clients.
Do You Have All Your Eggs In One Basket in Retirement?
Diversification is a conversation that you should have to avoid risks in retirement. You’ll hear the term of having, or not having, “all your eggs in one basket.” Clients even come to us with the idea of three financial advisors. They do not want to have all their money in one place. But what is diversification, really?…
