Controlling Expenses in Retirement
Here are some key takeaways:
– Expenses are possibly the biggest driver of what your retirement plan will look like.
– Big-ticket items like housing costs, outstanding debts, and healthcare expenses are what really move the needle in retirement planning.
– There’s an ongoing debate about whether to pay off a low-interest mortgage or keep it going in retirement.
– Selling a house and renting in retirement can be a viable option for some, eliminating upkeep costs and potentially freeing up more money for the portfolio.
– Healthcare costs can be a major hurdle for early retirement, especially for those retiring before Medicare eligibility at 65.
– Expenses are one of the most malleable factors in retirement planning that retirees have direct control over, unlike market performance or starting portfolio value.
– Controlling expenses is crucial for successful retirement planning, similar to how successful businesses control their costs.
Controlling Expenses in Retirement – Links
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Controlling Expenses in Retirement – Transcript
We’re going to talk about everyone’s favorite topic in retirement planning, and that is putting your expenses under the microscope.
This is something we harp on a lot when we’re talking to folks about retirement planning. Expenses are the biggest driver of what your retirement plan is going to look like. If you want to spend a lot of money, you’ve got to have a lot of money, and you’re going to need to take a lot of money from your portfolio.
So your starting point better be pretty high. This was all prompted by an article in the Wall Street Journal about a retired couple tracking their retirement. Their latest endeavor was putting their expenses under the microscope. I think they found they had some unused recurring subscriptions which amounted to maybe a couple hundred dollars per month.
It’s good to do that. It’s good practice to keep things clean and make sure nothing is getting swept under the rug or not noticed. But I think the big takeaway for me after reading it was that the big items in retirement, meaning your housing costs, maybe some outstanding car loans or other outstanding debt, those big-ticket items are really going to move the needle in one direction or the other in retirement.
There’s an ongoing debate in finance Twitter, I think since Twitter began, about whether you should pay off your mortgage if you have a low interest rate or just keep it going. There are folks out there that say you’ll never get three or four percent on a mortgage ever again, so it’s a low-cost loan and cheap money. I certainly get it.
I usually talk about the peace of mind that comes when you don’t have to pay a twenty-six hundred dollar mortgage payment or whatever it is you’re paying every month. Certainly in retirement, it doesn’t matter what the rate is. It’s a big nut to cover every month. But I think, especially with the mortgage decision, you also need to look at if you’re, let’s say, left with a hundred thousand dollars on your mortgage, is pulling a hundred thousand dollars from your overall portfolio due to the total that you have to work with.
You’re pulling a hundred thousand out of a balance that you would have to make last for the next thirty years. So suppose you had a hundred thousand dollars left on a mortgage and you had, let’s just use the number I was using, a twenty-six hundred dollar mortgage payment. That’s thirty-eight months, so about three years. I think the answer is going to be different for everybody, whether to say, “Hey, I’m going to take three years of mortgage payments and prepay it and be done with this thing, and then I’m not going to have that monthly payment anymore.” You’re still going to have insurance, you’re still going to have property taxes – they never go down.
But is it worth it? This is why you talk to a planner to do this kind of math and these projections. Let’s see what your numbers look like keeping the mortgage versus just getting rid of it. That’s the type of analysis that we often end up doing. I think, going back to the article, the upkeep for this couple living in an older home is pretty extensive. Things are falling apart, and there are big projects that have to be done on the house.
So just because you don’t have a mortgage, like you said Tom, you’re going to have property taxes at the very least. You’re going to have big bills. Upkeep is going to be an ongoing thing. And their point was, what if we sell the house and then move or even rent a condo? They were talking about moving across the country, but especially here in New Jersey, I think if you’ve been in your home for a while, you’ve probably seen a good amount of appreciation in the home’s value. You could probably make a good amount.
And then maybe you rent something, you stay in the area, and you don’t have to do that upkeep. Especially as you get older and you age more, and you’re not able to move around the house as well as you were when you were younger, doing that upkeep is another question – are you physically able to continue to do that? On top of the expenses that come along with it. These are all things that we’re talking about.
I think it’s a trade-off in terms of what makes financial sense for you and what you’d be happy with. I feel like for some people, getting the money from selling your house and then having more in your portfolio while you rent something works for them. Other people like owning their house and having a place that’s theirs.
No one’s going to up the rent or force them out or change anything about the agreement year to year. So there are a lot of considerations. Selling your house and renting is not going to work for a lot of people.
But there are definitely different levers that you could pull if you want to improve your situation or just change things up once you get to retirement.
I think, just like you were saying, the big-ticket items are really what’s going to improve a situation. Something that we come across for a lot of people when they’re considering whether to retire or not, depending on what age they are, is how they’re going to cover health care. Once you retire, usually health care is tied to benefits through your job. If you’re not sixty-five and not at Medicare age, you’re going to have to be on the open market for health care costs, and that’s usually one of the biggest hurdles for people if they want to retire at age fifty-eight, fifty-nine, or sixty years old.
I feel like people underestimate or don’t even think about at all how much getting open market coverage is going to cost them and how much it’s going to take away from their ability to retire at all.
What Tim is bringing up here has killed a lot of early retirement plans for folks that we’ve talked to, in the sense that they didn’t figure out that they’re going to need two thousand dollars a month just towards health care premiums. And that may come with a high deductible, you know, five thousand dollars or more. So, yeah, it really does change the landscape.
Or you could opt for less, a plan that doesn’t cost a lot, but you could potentially be leaving yourself open to a very large medical bill if things go wrong. Or you could take the most expensive plan out there and be covered for every single possible thing under the sun, or you could go the opposite route and try to minimize your costs on a monthly basis, but then, God forbid, something bad happens to you, you’re going to be on the hook for a pretty hefty bill.
I’ll also add, in a positive way, that if you decide to retire and you stop working, we’ve run into a lot of folks that sync automatically. Well, every two weeks or twice a month or whatever, when I get paid, I bring this to my checking account, to my bank account. This is what I get, and my expenses are x, and my income is y, and this is how I figure things out. But a lot of people overlook the fact that once they stop working, they’re not going to be contributing to a 401(k). Those expenses that came out pre-tax fall away. You’re not going to have FICA coming out of your paycheck anymore.
So your expenses are really going to change, and that’s part of our job – to help you realize, hey, some things fall away, other things do come up, and you need to be cognizant of this.
Does it mean that we need to have NFL Red Zone? I don’t know.
Yes.
No.
Maybe these are expenses we can cut.
I think to that point and the health care point, unfortunately, as people age, their health tends to get worse over time, and unexpected things happen. I think that health care expenses, even if you have a good plan later in life, you might need to go into an assisted living facility or have in-home care. Something like that. And those are really big-ticket items that come down later in life.
But to the point, I think it’s personal in terms of whether it’s better to have more in your starting base or more in your portfolio when you start and higher expenses, or is it better to have a lower starting point and lower expenses. It really is a personal decision that you have to make. We can share the dollars and cents with you.
One thing I do want to point out is the expenses. Why we hammer it home so much is because it is one of the most malleable factors in the retirement plan. You have direct control, to a certain extent of course, but you have direct control over what your expenses are, meaning that you can change them. You can tweak them as necessary.
For retirees, one thing to consider is that starting base you have, that starting portfolio value – the market’s going to give you something. We don’t know what it’s going to give you on a year-to-year basis, but over the long term, we expect that that’s going to increase your portfolio value. But that starting base is your starting base. You probably don’t want to go back to work if you’ve made that leap already.
So you’re not going to be making more income, but you can change your expenses. So I think that has to be taken into account when someone’s deciding this.
You guys know that I listen to the “Founders Podcast.”
I listen to every single episode. The whole concept behind Founders podcast is these are business owners who have become very successful, and we just study what these people have done through their stories, their biographies. In almost every single situation, these successful businesses were successful because they controlled their costs. They controlled their spending.
It was Rockefeller who said, “Look, I can’t predict what kind of income or how the business is going to do from year to year. We’re going to have periods of time where we do very poorly, but the one thing I can control is our expenses.” And that is one thing you can control as someone who’s contemplating retirement. I can’t tell you what the stock market’s going to give us next year or over the next five years or over the next ten years, but I can do something about my expenses. I can control my expenses. And you’ve got to focus on what you can control because everything else, you’re just spitting in the wind otherwise.
That’s a tough question that you asked before: Would you rather have lower expenses and a lower amount or higher expenses at a higher base? I think I would opt for the lower expenses and the lower amount, but you know, we’ve seen people here that have triple the amount of somebody else but they’re in a worse spot because they spend double the amount of what that person does. And things like medical costs popping up later in life could happen to somebody with low expenses or high expenses.
So I think keeping your expenses low, like you were saying, that’s the ticket for me, honestly. If you can figure out a way to spend less money, I think you’re going to be better off. Best-case scenario is you have a high asset starting total and low expenses.
So if you can do that, kudos to you. I think one thing we don’t want to see when we’re planning for retirement is someone gets a little out over their skis in terms of expenses, and they want to take more risk in their portfolio to try and out-earn their spending habits. I think that is a big no-no for us, especially if you’re already drawing from the account. Recipe for disaster.
Just wanted to see that in there because I know that that is a pretty common question that we come across all the time. So like a lot of things in retirement planning and personal finance, the answer is it depends on your personal situation and what you prefer and the trade-offs that you want to make.
That’s gonna wrap it up. Cool.
Did you hit the record button?
Uh I used that joke last time – I don’t think I will use it this time!
I left it in the last video also!
Yeah…Alright.
Alright, cool.
Cool.
Thanks guys!
