More on Retirement Spending

Today we’re going to continue sharing thoughts from the book How to Retire by Christine Benz.

It’s a great book which I highly recommend. And as with the last article, I’ll be giving away a copy of the book at the end of this post.

We’ve already posted on this book as follows:

• How to Retire
• Planning for Retirement
• Strong Relationships Make a Successful Retirement
• Activities, Meaning, and Mental Health in Retirement
• Thoughts on Social Security
• Everything You Want to Know About Retirement Spending

You may want to check these out if you missed them.

Today we’re covering two chapters as there’s just a bit I want to share from each one.

The first is chapter 6 where Christine talks with Jonathan Guyton, a retirement researcher and financial planner who has developed the “guardrails” retirement spending system. Much of their conversation is about setting a retirement withdrawal rate, a topic that also gets lots of conversation in the Millionaire Money Mentors forums.

Determining Your Retirement Spending

The conversation begins with Christine asking the following:

What’s the starting point when creating a retirement spending plan?

Here’s Jonathan’s response:

A critical starting point is to know how much you need and want to spend regularly. You cannot have confidence in a retirement spending plan unless you have confidence in the core spending amount that you want to sustain over the rest of your life.

There are three ways to do it. First, you could use software to track what you spend and categorize it. Second, you could use a good old simple budgeting spreadsheet divided into categories.

If you really don’t like those first two, the third way works really well: Get ahold of your last six- to 12-months’ worth of checking account statements. Note what the balance was at the beginning. Add up all of the monthly withdrawals and then note what your balance was at the end. The difference is exactly what you spent.

Then go back and look at those line items to see if there were any unusual ones in there — things that normally wouldn’t be there. This is the biggest reason why we find that people who’ve done a good job of saving vastly understate their spending power in retirement: They assume that the spending they want to do in the next year needs to be repeated at that level every single year for the rest of their lives. But that isn’t necessarily true, because in the next 12 months there might be a child’s wedding or a home improvement or some bucket list travel. Even though you might spend at that level for the next ten to Is years, you are not going to spend at that level for the next 30.

You really want to identify the total of the expenses that are going to be there every single year for the rest of your lives. That’s the basic spending number to work from.

Lots to say here:

• I highly, highly, highly recommend that you begin tracking your spending at least three years before retirement. Five years is even better. If you can’t do this for some reason, please do at least two years. This will give you the best feel for what you’re spending pre-retirement (which will give the best estimate of what you’ll spend post-retirement.)
• This is important because knowing what you want/plan to spend in retirement is foundational to creating a solid retirement financial plan. Do you want to guess at something that’s vital to your success? I think not…which is why you want real-life data.
• Once you have 2-3 years of spending information, create a mock retirement budget using this data. Add and subtract spending that needs to be adjusted for your new lifestyle. For example, you can probably cut “saving” in retirement as you’re past that point and are moving towards spending. You can also cut work-related costs like clothing, transportation, and meals. You might need to add health insurance, travel, and leisure expenses.
• Project the budget five years out (take the initial budget for year one, adjust for inflation, and use this as the base for years 2-5.) Then adjust categories up or down if you have reasons to (like a big cruise every other year). Also add in one-time, major expenses like college, weddings, and auto purchases.
• Now you have a five year spending plan that you can use to determine your withdrawal rate as well as compare to actual spending. You can make adjustments along the way (to either the budget or actual) as you need/want to.

The rest of the chapter covers other spending topics including withdrawal rate strategies, which you can dive into if you get the book.

Income in Retirement

I’d like to share and comment on two of Christine’s takeaways from the discussion, both dealing with retirement income, starting with this:

The more you have in non-portfolio income sources like Social Security, the easier it will be to adjust your spending in line with how the market has behaved. I loved Jonathan’s point about having a pot for discretionary spending categories — especially travel, which is likely to be heaviest in the first half of retirement and apt to wane as you age. Having a pot provides a lot of flexibility about when to spend.

I’m going to adjust that first sentence to this: The more you have in income, the easier retirement finances are. This is why I’ve harped (through the years) on income being greater than savings in retirement…it just makes everything better.

If you have sources of income like Social Security, a side hustle, dividend income (on index funds or dividend stocks), real estate income, a part-time job, and the like, you have more wiggle room in case things turn bad, you don’t need as much savings, you have greater flexibility, and so on. Income just makes life better. I’m a big fan.

There are lots of discussions about spending being higher at the start (and the end) of retirement, so spending more early on (as long as you don’t go crazy) seems like a decent plan for most people. Then you “catch up” in those middle years where you don’t spend as much.

Christine next comments on income-focused investment plans:

Investment strategies that focus on current income can either lead to underspending or portfolios that are inadequately diversified. Instead, build a portfolio for total return and stay opportunistic about where you go for cash flows on a year-to-year basis. When yields are higher, you may be able to get the cash flow you need from spending income distributions. When yields are lower, you’ll need to rely more on trimming appreciated securities. Your portfolio won’t know the difference!

I don’t think you should focus primarily on income, just to be clear. I have most of my investments in index funds, then set aside some for dividend stocks and real estate (plus I have two decent side hustles at this point — which bring me challenges (in a good way — they keep me sharp mentally), enjoyment, a sense of purpose (helping people), and a decent income (especially for the time invested.) At this point I have no bonds, though I do keep three years of expenses in cash.

More Spending Encouragement

Now we move to chapter 7 where Christine talks with Ramit Sethi, financial author, podcaster, YouTuber, etc. He’s best known for his for his website and book both titled I Will Teach You to be Rich.

Ramit has always had a unique perspective on spending and has some interesting thoughts to share here. These pertain to non-retirees as much as retirees, so there’s something here for everyone.

We’ll begin with this:

A little technique I would suggest is to create something I call a worry-free number. When we were in our 20s, we’d go to the grocery store and a pack of gum was a dollar. “Okay, I’ll throw it in the cart. No big deal. It’s not going to change my life in any way. I’m not going to worry about that expense.”

But as we make more money, we forget to adjust our worry-free number. So I want everybody to create a new worry-free number. It might be $5. It might be $50. It could be $5,000. But now you have a new number, and anytime you’re making a purchase below that number, you simply don’t worry about it.

You and your partner can actually have a really dynamic conversation about what your worry-free number is. Do you need to be debating, discussing, agonizing over a $50 grocery store purchase? Probably not. So let’s make a rule. Let’s do it jointly, and then let’s try it out for a month and, if we find the number is right, never worry about that stuff anymore.

We always had “personal accounts” back in the day when we were more closely managing our finances. These were budgeted accounts where each of us had money we could spend on anything we wanted without the need to discuss it with the other person. I would always spend mine on books…my wife almost always never spent all of hers. Hahaha.

As far as talking with each other about purchases, it would depend on what the purchase was. The more one of us had expertise or control of an area, the more leeway we each had. Outside of that, we probably wouldn’t have spent more than $100 (maybe $50 even) without talking it over with the other one. We never had a hard and fast number…and didn’t really need one since we were both generally frugal.

That was back in the day…when $50 was worth something. These days I’ll spend a few hundred up to $1k without talking to my wife. She is still pinching pennies (she’s a spending work in progress) so she hardly spends anything (at least on herself — she’ll drop $200 to $300 on every trip to Costco.)

Next Ramit shares this:

Money is, starting at age 40, the number one thing that people worry about.

Yet if you talk to the average person, they have never read a single book about personal finance. Not one. How can we get to retirement age and not understand the thing that we worry about and agonize over every day? The first thing I would say is, it’s important to get educated. There are so many resources!

This is so true!

I think we can all agree that money has a pretty big impact on everyone’s lives.

After all, it is used to secure food, clothing, and shelter to survive plus provide any extras that can make life easier and more enjoyable.

And the downside of mismanaging money is huge. It could be homelessness, hunger, and even death. Or it could simply be a miserable life (which is pretty bad in and of itself.)

So…it’s pretty important.

But how much time and effort does the average American give toward educating themselves on even the basics of how to handle money? Sheesh, if people spent as much time studying money (over their lifetimes) as they spend on one season of Breaking Bad, watching football, or similar activities, we’d be much better off financially.

I searched but couldn’t find any accurate information on how much time people spend on educating themselves on personal finance. But it can’t be much based on the disastrous financial situations of average Americans (low savings rates, high debt levels, low net worths, rampant consumerism, etc.) And when I did find something close (where people reported what they did — which often differs from reality), the #1 place they said they educated themselves on money management is family and friends. Hahahaha. Like those people know what they are doing.

If someone would spend five minutes a day listening to a financial podcast, watching YouTube videos, reading a money book, etc., that would be 30 hours a year! That’s enough time to get a pretty good money education in just a couple years.

But how many do even that? Hardly any.

What they do instead is muddle through life, maybe seeking financial help when they have an emergency, but when that’s over, they move on with their lives.

I saw this back when we were coaching people and have seen it for 20+ years blogging. These days I see it all the time on Reddit — where I stop by and try to share wisdom with the crowd. People there are completely clueless of how to manage money and must resort to asking strangers on the internet (with dubious money management skills themselves) about what to do with their lives!

Most of these people (IMO) need to take responsibility and educate themselves about money management so they can make good decisions on their own.

This is so common that I’ve developed a standard Reddit reply which I copy and paste fairly often. It reads:

You need to educate yourself about how to manage money. You have a long life ahead of you so you’ll consistently have questions about what to do unless you learn the specifics yourself.

Start with a beginner book like Personal Finance for Dummies or the Total Money Makeover. Then read The Simple Path to Wealth, which will teach you about investing.

That said, the general steps to becoming wealthy are:

1. Earn as much as you can. This is generally through a career but can be a business (though it’s often riskier and takes longer to grow).

2. Save as much as you can from your earnings. Keep expenses low/reasonable.

3. Invest those savings in low cost index funds.

Hahaha. I am likely laboring in vain, but at least I’m trying to help!

Having Trouble Spending

Ramit shares this next:

I spoke to a couple who are part of the Financial Independence, Retire Early (FIRE) community. By age 50 they retired with $4.3 million. They’re very accomplished. But they struggle to spend money. They agonize over it. I shared this story on my podcast because many of us cover our financial anxieties by telling ourselves, “If I just had $10,000 more, or $50,000 more, or I retired, then I would be comfortable. I would feel good.” I routinely feature multi-millionaire couples who can’t shake their feelings of guilt and overwhelming anxiety. Many of them still drive five miles to save ten cents on gas.

That’s not a rich life. It can’t be a rich life if your entire focus is on how not to spend money instead of how to use your money to create meaning.

I think I know the people he’s talking about. They are great folks and are highly educated on money matters.

And yet, they have trouble spending what they have saved. And I can tell you, they are not alone.

I would say the majority of retired millionaires have issues spending money. They have built a fortune on being frugal (at least relative to income) and that habit is hard to kick. That’s why one of the most popular topics in the Millionaire Money Mentors forums is the “Let’s Spend Some Money” thread where we encourage and celebrate people spending money on things that improve their lives.

A few other comments on this before we move on:

• “Feeling of guilt and overwhelming anxiety.” I’ve never had feelings of guilt for having or spending money (I have felt bad after a terrible purchase, but not guilty). I only had money anxiety for the first week of retirement. It was really just fear of the unknown. Once I realized the world wasn’t going to collapse and the police weren’t coming to get me (because it felt like I was getting away with a crime by not going to work), my fear turned to joy and I haven’t looked back!
• This said, many people struggle with having enough (thinking they need more). It is very common for the answer to “how much is enough?” to be “just a bit more.” It doesn’t matter how much you have. Those with $2 million want $3 million, those with $5 million want $6 million, those with $10 million want $11 million, and on and on…there seems to be no limit where this stops. People think security is “just a bit more”, but once they get to that point, they raise the bar.
• “Many of them still drive five miles to save ten cents on gas.” Hahaha. We don’t do this, but my wife (in particular) does have a hard time NOT saving money, even if it’s inconvenient or requires additional expense elsewhere (like the cost of driving). But she’s working on it. lol
• “How to use your money to create meaning.” This is key. You want to spend in a way that makes something better — your life or someone else’s. Many times there’s a push from the “spend, spend, spend” crowd that seems to suggest that spending on anything is good, productive, and makes life better. This is not true. I could name a hundred things I could spend money on that would make my life worse. So the spending needs to create meaning…you can’t just spend for spendings sake and expect to be better off.
• What is meaningful is different for each person, so spending should be different from person to person. Some project what is meaningful to them on others, saying they should spend on this or that, but the spending has to have meaning for the individual. If it doesn’t, it’s worthless at best or at worst makes life less enjoyable.
• At this point in life, I don’t have a lot of spending that creates meaning relative to our income or wealth. I buy what I want and yet there’s plenty left over — which means I worked too long and should have retired much earlier, but that ship has sailed. What does create meaning for us is giving, so that’s our biggest “expense” these days by far.

Moving the conversation along, Christine then suggests this:

It sounds like you think people should practice spending, and spending on what gives them joy, well before retirement.

To which Ramit responds:

The years between age 40 and 60 are prime spending years.

Before 40, most people don’t have any money. After 60, many people have health issues that arise, whether with themselves or their family members.

If you haven’t started spending your money meaningfully before 60, it doesn’t mean it’s too late. But the message that I want to emphasize is that today is our best day. It’s our best day of health. It’s our best day of time. It’s our best day of relationships with the people around us. Tomorrow, it becomes just a little harder, and there’s a ticking clock.

Some thoughts:

• I should have spent more while working on financial independence. In particular, I wish we had started taking cruises as a family earlier. That’s the main spending thing we missed along the way. There’s not much else I would have wanted to spend on, but that’s a big one.
• “Today is our best day. It’s our best day of health. Tomorrow, it becomes just a little harder, and there’s a ticking clock.” This is a reason to retire asap. We have a few threads at the Millionaire Money Mentors that deal with this topic. Some share stories of people who put off retiring when they have more than enough (one more year syndrome is a real thing) only to have some unfortunate event happen (they pass away, their spouse passes, etc.), others tell of people suddenly passing away in their 40’s, 50’s, or early 60’s, and others recount lost hobbies and activities that people can no longer enjoy. Just remember that tomorrow is not guaranteed and anything you’re committing to today is the biggest cost time/life-wise that you’ll make for the rest of your life.

Thought-provoking stuff, huh?

To read the next post in this series, see Retirement Income, Asset Allocation, and Index Funds.

——————————————

As I said above, I’m giving away a copy of How to Retire on every post I do about the book. Here’s how to you can enter:

• Leave a comment below telling me what you liked best about this post, what you think you can use, or something you learned from it. Basically just share anything meaningful related to the content above (note: “please enter me to win” and similar comments will not be considered out of pure weakness! At least put a bit of effort into it!) This should be fun!
• Be sure to leave your email address when you leave the comment so I will know how to reach you if you win (the email address will not be visible to anyone other than me).
• The winners will be selected by me at random a few days after this post goes live. I’ll announce who wins in my own comment.
• I’ll email the winner, get their address, and send them a book from Amazon.

As with most giveaways, there are rules. Here they are.

Good luck!!!!