Moving From Saver To Spender
We are learning that moving from saver to spender is hard. In this episode of the podcast, Casey and Tom discuss the difficult time some individuals have when they retire. Specifically, moving from saver to spender. Most of our working careers, money tends to flow in one direction: OUT.
Money moves toward paying down debt, saving for a home, home repairs, perhaps an occasional vacation, saving for college, saving for retirement.
But upon retirement, the money ought to begin flowing the other way – toward things you WANT to do, not necessarily HAVE to do. We have found some of the best savers have a tough time spending money in their retirement. After all, they have been conditioned to save, not spend. And they worry that – at some point – their expenses may overwhelm their savings. It’s a big unknown. And thus becomes a “worry spot” for many as they are moving from saver to spender.
Links for Moving From Saver To Spender
Transcript: Moving From Saver to Spender
Hello and welcome back to the Mullooly Asset Podcast. I’m your for today, Casey Mullooly. Joining me at the table this week is Tom, and we have a pretty interesting topic to talk about. It concerns retirement spending and it’s part psychological and part habit breaking. Habit breaking, but we’re going to talk about spending money in retirement and how it can feel different to spend money when you’re getting income versus spending when it is coming from your investment portfolio.
I think the big adjustment for everybody is they’ve been working for 30 years, 35, maybe 40 years, and now they’re retired, and so the direction of money has always been, during their working career, out of their hands and into either an expense or saving for some future event, like paying for a college or a wedding or something like that, or putting money away for your own retirement and so the money has been going in one direction out. Now things are starting to shift.
Yeah, you’re doing the exact opposite. You’re taking money and you’re not saving money. A lot of retirees, or people that are close to retiree the biggest fear they have is they don’t want to run out of money, so they work this is the number one answer that we get.
Yeah, people, when they come to us, people want to be sure that they have enough money to live on, meaning they’re going to use their investments, their hard-earned savings. They’re going to use that money to live on for the rest of their life. Most people don’t want to go back to work, even if it’s part-time, so they’re relying on their investments to support their lifestyles, along with things like social security.
Maybe they’re getting a pension as well, but it’s a big change and it is. Some people have trouble making that change and some people will underspend what they can. Some people spend much less than they could spend just because they’re. They have that fear that they’re they’re going to run out of money.
If you’re a good saver, you’ll recognize this term. Maybe it’s a feeling. It’s called delayed gratification. If you have been a good saver, you know what this is about. Like I will put off instead of spending money today on something. I’m going to just push that down the road into the future. But the future for retired folks is now.
It’s now and it nobody knows how long it’s going to last, for it could last for 10 years, it could last for 50 plus years. Nobody knows, and that’s one of the problems. Christine Benz, who writes at Morningstar – we reference her stuff a lot on videos and podcasts. She’s a great writer and tackles a lot of these important topics for retirees. She wrote about this and we’ll link it up in the show notes. One of the things that she suggested to do to solve this issue of spending from income – versus spending from savings, is to consider an annuity.
She recommends a plain vanilla type annuity, a single premium, immediate annuity. That means you’re basically taking a lump sum from your retirement account and using it to purchase a stream of income for as long as you live.
Very few people who sell annuities for a living will want you to do this. Because – let’s call it what it is – they’re going to get paid more if you put money into a deferred annuity.
Deferred means: I’m not going to be taking money now.
Immediate means: Send me a check next month and every month thereafter.
This is what we’re talking about. With an immediate annuity, you’re basically flattening out part of your assets into an income stream, instead of having this $100,000 sitting over here hoping you can get good returns from it. No, I’m going to turn this into $792 a month for the rest of my life or for 10 years, whatever the period may be.
This is what I meant when I said it’s a psychological thing. It’s basically the same amount of money, but it could feel better to get that $792, that’s just an estimation but to get some cash flow each month from the annuity, versus pulling the same amount from your investment portfolio.
And it works like a pension check or a social security check, where that money comes in every month like clockwork, never going to change. Never have to worry about the stock market, never have to worry about how the economy is doing. You’re going to get that income regardless.
So just to throw some cold water on that idea, I think it is a good it could allow you to feel better about your money, then it is a good idea. But there are some things that you should be aware of. If this is the route that you go with an annuity, you sacrifice some liquidity, because that I mean you’re going to be getting a set amount each month, but you can’t access the money in a lump sum if you need it.
Yeah, let me take that a step further. When you purchase an annuity that’s going to it’s an immediate annuity and you are – to use an industry term – you’re “annuitizing” this contract. You’re getting money… you have given up the $100,000. So that’s what I meant when I said you flatten that asset, in the sense that you can’t call up the insurance company and say, “hey, I want my $100,000 back,” or “I guess I’ve taken money out so I want my $92,000 back.”
It does not work that way. So once you turn the money over and say I would like in return to get a monthly check, that asset pool is off limits. You cannot get it back.
Yeah, no givebacks.
The other thing about fixed annuity, and you said that it is going to be the same payment each month. I think that is could raise some alarm bells for retirees as well. Because there’s this thing called inflation that we’ve had to deal with over the last two years.
So, even when we had no inflation, there’s still some inflation.
So that $792 that you get each month might not get you as much down the road as it does today. So something to consider if you do decide to purchase an annuity.
I am not a fan of it.
I do think that there is some psychological benefits to it. But I agree with you. I think that you can… there’s better ways to do this – you could do — you could have your money in short-term bond funds and just I guess you’re.
You can tell your advisor “send me $800 a month. You manage it.” And the way the advisor ought to do it is they ought to have this money sitting in cash or a short-term bond fund to cover the next year of payouts. Or the next two years, or maybe even the next three years of payouts. Let the rest of the money compound. That’s just the way I would do it.
That’s one of Christine Benz’s suggestions too is to kind of take it out of your hands and let an advisor handle it for you. What one of the other suggestions was to “tilt” your portfolio towards current income. So that means you want to own investments that kickoff income. She mentioned things like dividend paying stocks and even TIPs, which are Treasury inflation protected securities.
The idea is you want to have your investments kick off some income. You get that money in in a monthly check from the investments that you own and that can kind of relieve some of that burden of spending from your portfolio.
I think it’s worth bringing up when we talk about getting getting income from your portfolio. You know for many years there was no income to be had – rates on CDs – and even rates on treasuries… you needed a microscope to see numbers that small. So people didn’t really talk clients OR advisors – did not really talk about the tax implications that come with that.
But if you’re getting 5% on a dividend or some kind of interest bearing account. All of a sudden now you’re going to get a 1099. Some of that money is going to be taxable. Something that we didn’t have to deal with over the last, say 15 or 20 years.
So you’re going to be getting more in income because rates are higher, but you’re also going to have to pay some taxes on that. So definitely something to consider with that option, not to mention the risk of owning, you know, strictly dividend paying securities. I think that’s a topic for another video or podcast. But another option she mentions, and this one I don’t know how I feel about this one, it is she suggested to tie your portfolio withdrawals to your portfolio’s performance.
Before we dig into it, I will say right up front I will do everything in my power to talk you out of doing this.
I don’t know anyone who would actually do it this way, because it kind of feels like so. The idea is, when the market has a good year let’s say the market makes 20% in a year, your investments are up, you can spend more from your portfolio in the year following. And then, if the market performs poorly and is down, then you have to cut back spending in the next, in the following year.
So you kind of get punished for doing something that – this is assuming your portfolio is properly aligned and stuff like that. That means you’re gonna get punished for owning what you should own. And I don’t know if that feels like a good idea to me.
A couple of thoughts. When we’ve had conversations with clients that have gone down this path, I usually propose “let’s play a game.” And here’s the game that we’re gonna play. You are going to call me on January 2nd – because January 1st is a holiday – but we’re going to have a conversation on January 2nd.
You, Mr. Client, are going to ask me “So, how did our investments do last year?” “Well, we made 8%.” Great, Tom. Send me the 8%.”
Sounds easy, and this is basically what’s being proposed. But to do that, first of all, we may have made 8% through December 31st. January 2nd the market could be down, and so you actually made 7.5%.
But it also means selling absolutely every investment that you had in the account. And if we’re doing this year after year after year, on January 2nd – you’re not eligible for long-term capital gains taxes. So everything is a short-term gain. I don’t know. I just don’t see how that’s going to work. The other part of this is the math isn’t really going to work because if we have a negative year – are you actually going to send money back into your account?
Right. It just doesn’t work that way. Yeah, what’s the number one rule? Don’t unnecessarily interrupt the compounding, right? That’s what you’re doing.
If you do it that way, 100% yes.
So there was another option that Christine Benz had written about.
Yeah, it could be a saving grace for retirees. And that’s the fact that spending tends to trend down the longer your retirement lasts. So let’s say you retire at age 65. Your highest spending years are probably going to be 65 to 70. She points out that it really starts to trend down around 80s and then healthcare expenses kind of ticks it up a little bit. But it never gets back to where it started at in your first couple of years of retirement.
So she talks about the 4% rule a lot. That’s the rule of thumb that you could spend 4% of your portfolio each year in retirement. She says maybe in the first couple of years you could spend a little bit more than that and then it’ll trend down over time. So again, that’s just a rule of thumb, but something for retirees to consider.
There seems to be a lot of interpretation – and misinterpretation – of the 4% rule. We found that when clients do bring up the 4% rule, we usually tack on to the conversation that “4% is a good starting point for a dialogue, not a good starting point for distribution.”
“Dialogue okay. Distribution? Not so much.”
Yeah, that’s a good distinction to make.
So Christine linked to another retirement study done. She linked to it in her article. This retirement study was done by Fidelity and it basically assessed America’s retirement preparedness. They surveyed 3,500 households. And 48% of those households are going to be, are on track to cover at least their essential expenses in retirement. So that’s less than half. Doesn’t seem too good To me.
No, it wouldn’t give me a warm, fuzzy feeling.
Only 32% of households are going to be able to cover more than 95% of their total estimated expenses.
Say that again, real slow.
32% of households are on track to be able to cover more than 95% of their total estimated expenses.
That’s estimated expenses.
It doesn’t include stuff that happens every year.
Every month something happens!
Not a pretty picture.
It’s not, and it’s interesting because in Christine’s article, she found that the people who have problems with spending money from their portfolios are the people who actually have the most money. Yeah, so people who have socked away… they’ve been really good savers. They have learned that delayed gratification that you mentioned earlier. They’ve done a really good job at that. And now they can’t make the change to start spending their money.
It depends because some people want to leave their money to the next generation or donate their money later in life. But I don’t know a lot of people who want to pass away with a lot of money unspent. I feel like they would rather have spent that money. And I think it’s our job, as advisors, to work with those people and to figure out ways to make them comfortable with spending from spending an appropriate amount from their portfolios.
I know Christine also referenced an article in the Washington Post. The funny thing is it’s an article that she’s actually referenced to and we’ll link to this in the show notes. How the author had her husband had just retired. And just a couple of tidbits out of this:
“My husband and I are fortunate we have enough for retirement, but ever since he retired at the end of June, I felt a sleep-deprived dread. I worry we’ll outlive our money.”
It talks about how, before they retired, they paid off their home. They don’t carry any credit card debt, they have no auto loans and they haven’t for years. And they saved enough to send their three kids to college without any debt. And yet, she writes, “I’m scared.”
This IS super common. We have this conversation. We hear this a lot. And we have this conversation with folks ALL the time. It’s hard to flip the switch. You’ve been a very diligent person – saving, saving, saving.
Now we want you to reverse course — not become queen of QVC.
But it’s OK. It’s OK to spend a little money.
So, whether that means doing some of the things that Christine Benz mentioned in her article, or figuring out what works for you, we’re here to help you figure out. If you’ve got this worry and this question of “can I spend this money?” we’re standing by ready to help.
I think that’s going to wrap it up for this week’s podcast. This was episode 453. I don’t know if I mentioned that in the beginning. Thank you, as always, for listening. We’ll be back with you next week.
Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Comments of Mullooly Asset Management may maintain positions and securities discussed in this podcast.