It’s OK to Spend Money in Retirement

It’s OK to Spend Money in Retirement

Here are some key takeaways:
– Even wealthy retirees fear outliving their money, struggling to transition to spend money in retirement
– It’s important to do personalized financial analysis to determine how much “slack” is in your retirement plan
– Retirees need to mentally give themselves “permission” to spend money in retirement
– Retirement spending isn’t necessarily a straight line – it may fluctuate over time
– Some may find it easier to spend from guaranteed income sources like pensions or Social Security
– Unfortunately, some are reluctant to touch their “money mountain” and may live frugally as a result

It’s OK to Spend Money in Retirement – Links

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Link to Wall Street Journal article referenced (Rich Retirees Fear Living Longer Means Not Having Enough Money)

It’s OK to Spend Money in Retirement – Transcript

OK. So we’re going to be referencing an article from The Wall Street Journal. It’s titled “Even Rich Retirees Fear Outliving Their Money,” and this is a topic that we’ve talked about on videos and podcasts before.

We talk about it every day here in the conference room with clients. It’s a real thing too.

The gist is, people spend their whole lives working, they save a bunch of money and then they get to retirement and they really struggle to spend money in retirement.
Because, you know, those two mindsets are opposite of one another.

So just to pull a nugget from the article here:

Those in the top 20% of wealth distribution could safely spend money in retirement an estimated $773,000 to $1.165 million more over a 30-year retirement, depending on how their money is invested, while still setting aside 40% of their initial wealth for emergencies or bequests. This was a quote from Michael Finke, a professor at the American College of Financial Services.

On a yearly basis, that breaks out to spending $25,000 to $39,000 more per year that folks could spend money in retirement, but they aren’t spending. How can these retirees assure themselves that they are in a good spot and that it’s OK, it’s safe to spend this money?

You’ve got to do the work to determine it. I think if I have one qualm with articles like this, it’s like using these big numbers. Because it makes it sound like, I don’t know, it’s like quoting the national debt without also quoting assets that are in support of that debt.

It’s like a big number that everyone goes, “Wow, that’s a lot,” and I don’t know, like, on a personal level, I think you need to do the work to determine how much leeway your plan has.

I mean, and our process for getting there is taking a look at expense estimates. And basically holding them up against the liquid assets that could be conceivably used to pay for them alongside income sources and determining the gap.

And that’s how, like on a personal level, you could run this sort of analysis and get to a number that could speak to how much slack there is or not in your plan.

Yeah, I think they interviewed a couple, I forget where they’re from, but they interviewed a couple who found that they were spending about $1800 a month more than they initially planned on, and the guy re-ran some numbers and found out that this was actually OK. So they felt better about doing that, taking trips, giving money to their kids, those kinds of things.

Just looking at these numbers. On the low end, if it’s an extra $25,000 a year.

If you build a porch or a deck or you fix up your backyard – or you do something at home and you spend $90,000 or $100,000, that’s 4 years of the math that they have.

And so I think the first thing that people need to do, it’s off balance sheet, so it’s not something that we normally talk about — is these folks who are retired, they need to mentally give themselves permission to spend this money. You worked really hard for it.

You’re now at a point in your life where you can enjoy it. And that may be enjoyment from giving it to other family members who need it. Or doing something that you’ve always wanted to do around the house. But you have to start with something — and start with something small, spend $5000 on something.

But you have to give yourself permission that it’s OK to let go, and to spend some of this money. You’re going to be OK.

I think the article made an interesting point. And it’s something that we talk about when we’re meeting with people and having these conversations in real life.

And that’s identifying a couple of values. Like you said, if you want to make your home more comfortable, if you want to make it more comfortable for you to live in, and to “age in place” there, that’s great.

Maybe you want to travel, maybe you want to play golf, join a new country club.
Maybe you want to pay for your grandkids’ tuition.

It doesn’t matter what it is, but it’s identifying those values or those expenses ahead of time. And then maybe, just some mental accounting, just break it up. Break your money up into different buckets and assign certain dollar totals to each bucket.

So then you’re not taking from the big pool, you’re taking from money that’s already allocated to a specific cause.

It’s so hard to do because you start in your twenties when you’re working, and people get pounded into their brains that “I have to save for retirement, I have to save for retirement.”

And “we can’t rely on Social Security.”

We get it.

But you get to a point where you have to flip that switch and say, “all right, the saving part is now over, I am now moving from saver to consumer.”
It’s a very hard thing to do, very hard.
And we have seen plenty of case studies right here in the office.

I think one of the things that’s lurking around the corner is longevity risk. Maybe living for longer than you planned on.

I know when we make plans for having folks live into their 90s, then usually there are some associated, some elevated costs that are associated with living that long, maybe that’s having at-home care or putting someone in a nursing home or something like that.

People want to keep a nest egg behind, in case of that emergency. The article threw out the idea of using your home equity.

If you own a home, using your home equity as a kind of bucket for that long-term care need. That would involve selling the house. I know people have emotional attachments to their homes and getting people out of there is sometimes tricky and not always a straightforward solution, but…

I think we have to plan for people living into their 90s because that’s just the way that things have gone over the last 40 or 50 years. People are living longer and we have to plan for that happening.

I’ll toss this one over to Brendan. When it comes to spend money in retirement, is it a straight line? That may be a layup question for you.
A lot of people think that the spending is going to be at this level for the next 25 years.

I don’t know, I feel like it’s almost gone the other direction lately — where everybody assumes that they’re going to spend money in retirement way less later on, as well. And I get the sentiment there — in terms of wanting to do stuff while you can enjoy your money. But to say that you’re “for sure going to spend less” 20 years from now, just because you’re old? We don’t know that for sure.

So it’s always a balancing act of “wanting to do these things now and enjoy your money,” and we certainly encourage people to do that when we’ve done the work to say that they can afford to do it.

But also, don’t do that without having done the work!

Because I think you run the risk of what the article says — is the fear of running out. I think you have to do the work to get to these numbers and to just say that spending is going to go such, we don’t know what spending is going to do.

The best estimate of what it’s going to be in the future is “some version of today, run out by a rate of inflation.”

I think you have to take inventory, over time, to see how that’s tracking.

It may well be that expenses are going to be lower in the future. And at that point, if they are, then you probably regret not spending more sooner.

If you’re in a good place, and your expenses are dropping, then it’s an opportunity that exists.

You have more “dollars in your account” that could have been “experiences.”
You don’t want that, on the other hand, you don’t want an empty account with bills to pay.

So it’s a balancing act. I wish there were a good clear-cut answer! But I think just checking in over time, to see how expenses are going and how assets have grown or been depleted over time is the only thing that you can do.

I feel like another, to your point, Brendan, it’s a movement, I don’t know how to define it, but I think there was a book called “Dying with Zero.”

Where, basically if you die with anything left in your investment accounts, then you missed out on all of these opportunities. And you should have spent more in the beginning. And I think that the sentiment, like you said, it’s a balancing act.

I agree you should enjoy your life while you still can. I’m all for that. But I don’t think keeping some money saved in your investment accounts for a rainy day or for the end or leaving that to your kids — I don’t think that’s a failure that it’s necessarily being painted as in these kind of discussions.

It’s all personal preference! How do you want things to end up? And I think the point of doing the work, just speaks to that even further.

Yeah, we shouldn’t shame people who end their lives with money, if that money in their account enabled them to have peace of mind and live their life.

Then not dying with zero is not a failure, I don’t think. I think it’s gone too far in that direction. I would like to introduce some balance back to the picture here, and I understand where people are coming from.

Because certainly you don’t want to leave things on the table, but I think you can balance that and feel comfortable about what you have for the long term. And also maximize what you’re doing in the present, to make sure you and your loved ones are enjoying every bit of it.

Because like none of us are promised tomorrow at the end of the day, so that is true, and I’m totally with that, but there’s some work, I think that goes into determining what your version of that balance is.

Agreed.

I think another interesting tidbit from the article was that people find it easier to spend money in retirement from guaranteed sources of income. They find it easier to spend from things like pensions or Social Security, or guaranteed annuities.

We were literally, you and I, just talking about this a couple of hours ago before we recorded this.

Yeah, it’s easier to spend money in retirement when you’re getting a paycheck each month. If you’re getting a pension or Social Security, that’s your own money coming back to you that you paid into the system.

Coming back to you, so it is basically replicating that paycheck. Instead of pulling from your portfolio or whatever your pool of assets is and taking lump sums out or an individual amount out each month.

I totally agree with what you’re saying. We’ve seen it where people are like, “hey, I’m going to retire when I get $2 million — I’m out. I’m done.”
And then — to get them to start taking little bits of that $2 million out as they retire.

They don’t want to do it! They don’t want to touch it.
And so they will live like misers in retirement!

Because they don’t want to attack the “money mountain” that they’ve got.

On the flip side, we also know people who say, “I’m guaranteed this income, so I’m going to spend it this year — because next year I’m getting the same amount of money in my bank account. That’s my pension coming in, or that’s my pension plus Social Security, or that’s my deal from selling my company.”

Everyone’s a little different.
Yeah, it’s mental accounting, but definitely feels like people treat these buckets differently.

I don’t know if that’s irrational, but yeah. If we acknowledge that, then there are ways to, again though, like, to the person who is reluctant to spend from a portfolio because they don’t want it to dip below a certain amount, where they’re only willing to spend in retirement — what they make, in a given year — if they have aspirations to do that.

Which for a stock bond portfolio is incredibly unrealistic.

Yeah.

I don’t think that it changes. In the sense of what they could do is buy a single premium immediate annuity to transform their asset into an income. So they’d feel more comfortable spending it.

But they have to take the lump sum to purchase the annuity, which sounds like it would be counter to the whole mindset.

So like, sure, that’s a solution, but I don’t know that it IS a solution — because we’re really talking about a mental block here. As opposed to anything financial or quantifiable that’s holding them up.

It’s really, it’s just a mentality thing, yeah.

Going to be different for everyone.

It is, it is.

There was another Wall Street Journal article taking a look at what pensions look like in America. It said about 15% of private sector workers — and most government workers — can expect some sort of pension.

They interviewed 4 people, across the states. And the interesting thing that of these people that they interviewed, the highest expenses per year were $113,000, which is about $9400 per month.

Having the guaranteed sources of income is great. But the people found they all lived below their means and didn’t spend over and above their pensions, plus Social Security.

So I think that is another thing that we talked about a lot is expenses and people. If you have a pension and Social Security — and you don’t spend a lot of money, then you’re probably going to be in pretty good shape.