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3 Spending Mistakes That Can Derail Retirement · Retire and Thrive

• 0:00
  All right, so let's get into it. Some mistakes that you see when
• 0:02
  it comes to spending, we don't want to derail retirement.
• 0:06
  How do we avoid that? For a lot of people, making that
• 0:09
  shift of not contributing to their retirement and they're
• 0:11
  actually pulling out, it scares them.
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  We share with them the number one thing is we'll do everything
• 0:16
  we can that you don't run out of money.
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  And then I always followed up with the number 2 is to
• 0:20
  encourage you to spend the money and do the things you want to do
• 0:24
  while you're still healthy. And I get asked the question
• 0:27
  frequently, should we budget to spend more money in retirement
• 0:31
  or less money? Welcome back to another edition
• 0:36
  of Retire and Thrive, where we help you live your life with
• 0:38
  purpose, wealth, and confidence. I'm Tammy, This is Dan.
• 0:42
  Thanks for joining us this week. Today we are talking about
• 0:45
  spending and three possible spending mistakes that can
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  derail retirement. So very important as we look at
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  our spending portfolios and our habits and what we should be
• 0:59
  doing in retirement. Dan.
• 1:01
  Do we have to talk about spending?
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  We do because that's a big part of retirement.
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  You have to spend on trips and the kids and maybe not spend so
• 1:09
  much on some things. Check your budget.
• 1:12
  Spending's good. It's more exciting than taxes in
• 1:14
  my opinion. Well, I know, but last week we
• 1:16
  talked about income, which is fun, that is.
• 1:19
  Fun. And then you have to spend the
• 1:20
  income. Now we got to kind of constrain
• 1:22
  what we can spend, maybe not constrain.
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  The only reason there is income is to spend it right?
• 1:27
  I guess that's a good point, Yeah.
• 1:28
  And I think we'll get into it this episode.
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  I'm not 100% sure as I'm with all these episodes either.
• 1:34
  You throw these questions at me. Or I, I think of them when you
• 1:37
  respond, you make me think of different questions that we're
• 1:40
  talking about retirement age, but we're also talking about all
• 1:43
  different ages. This can apply to really
• 1:45
  everyone because spending is something to keep an eye on and
• 1:49
  how it can impact you in the long run.
• 1:51
  It's important. Yeah.
• 1:52
  All right, so let's get into it. Some mistakes that you see when
• 1:55
  it comes to spending, we don't want to derail retirement.
• 1:59
  How do we avoid that? So let me just think here for a
• 2:04
  minute. I, I, I feel like one of the
• 2:07
  things in my kids are going to laugh, you know, if they watch
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  this episode because this does pertain to the younger
• 2:13
  generation too. Sure, But I would say one of the
• 2:16
  mistakes would be overspending too early.
• 2:21
  OK. And that could be too early,
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  like in your 20s and 30s, or it could be too early, like when
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  you're newly retired and you don't really have a plan.
• 2:31
  You're just overspending. And so, you know, my kids, ever
• 2:37
  since they were teenagers, that's why I want to make
• 2:39
  reference to them here in this episode.
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  You know, I would say something like they would go to the
• 2:45
  grocery store and buy some bag of chips or they'd buy, you
• 2:49
  know, different things. And they're like, I know, I know
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  that $5 compounded overtime is going to be worth 60 bucks when
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  I'm 6. I get it.
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  But it was worth the $5 since then.
• 2:58
  So that's that whole compound. And so the overspending, you
• 3:04
  know, does apply to the younger generation too.
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  And I know this episode is really more or this, you know,
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  this whole podcast to senator on retirees.
• 3:13
  But every once in a while, there are times where I think it is
• 3:16
  applicable to the accumulators so that, you know, by starting
• 3:20
  earlier, it does make a huge difference.
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  And frequently I get asked to talk to high schools and
• 3:24
  colleges. And I just continue to emphasize
• 3:28
  the importance of compound interest starting early like our
• 3:31
  parents and potentially our grandparents talked about.
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  But it is crucial and starting early makes a massive, massive
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  difference. And that's not the purpose of
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  today, but overspending without a plan.
• 3:43
  Let me just touch on that. With retirees.
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  There is something that when we build out a financial plan and
• 3:54
  we look at people spending patterns and if they're pretty
• 3:58
  accurate, we can dial this in so that we can kind of build out or
• 4:03
  forecast what the next 10 or 15 or 20 years are going to look
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  like. Obviously, there's a lot of
• 4:08
  assumptions that go into these financial plans so that if we
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  assume a 6% return or a 5% return or if we assume certain
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  withdrawal rates. But again, there are times where
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  we try to build in some buffers when it comes to budgets like we
• 4:23
  touched on last episode. So when we build out this plan,
• 4:29
  it may include what they're spending for their day-to-day
• 4:33
  needs, but then it may also include property taxes.
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  We may build in a travel budget from say 65 to 80.
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  We may build in, you know, gifts to grandchildren, what whatever
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  it might be, but then life happens and things do change.
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  So we have unexpected expenses. And so we try to factor that in.
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  And one of the things that I always encourage people do, you
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  know, we talk about, you know, one of the the the mistakes is
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  overspending, You know, without a plan is when you newly retire
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  is this kind of ties in the mistakes and it's called
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  sequence of withdrawals. And I know I just came up with
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  that thought and she might what do you mean?
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  Sequence of what? I'm waiting for an explanation
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  here. So if you, a lot of times we
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  build out a 5% rate of return in our plan, OK, we have a lot of
• 5:28
  reasons why we use that number. And again, I've mentioned it
• 5:31
  before, returns unless it's in a guaranteed an account, But if
• 5:35
  you've got a diversified portfolio, they're not straight
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  symmetrical returns of 5%, but we build in a 5% return.
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  The plan typically models a consistent rate of return and if
• 5:45
  we're earning something greater than 5%, everything looks
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  wonderful. But there are times and you
• 5:51
  maybe can't appreciate this, but there are times where the
• 5:53
  markets do not do very well and they don't do very well for long
• 5:57
  periods of times. So I could use COVID, but COVID
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  isn't really even that great of an example because the market
• 6:04
  went way down, but then within six months came right back,
• 6:07
  right? But I can use 2008 and 2009 or
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  even worse, from 2000 to 2002 during what we refer to as the
• 6:19
  tech bubble, where the tech sector, depending on which index
• 6:25
  you're referring to or looking at, lost half of its money and
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  it took almost 10 years to get that money back.
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  So that's the sequence of withdrawals.
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  If I'm pulling out 5% but the market goes down three years in
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  a row, that 5% return is inaccurate.
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  And if I'm pulling out a withdrawal rate of 4%, again,
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  let me just use basic math. If I've got $1,000,000
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  portfolio, I'm pulling out 4%. I'm pulling out $40,000.
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  If I'm averaging 5%, making $50,000 a year, I'm pulling out
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  40. So this thing in theory should
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  continue to sustain itself. But what happens if the markets
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  down 20% and I'm down 12 and then the following year the
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  Mark's down 20%, I'm down another 12, and so on and so
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  forth. You can see the the implications
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  here. All sudden My Portfolio goes
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  from 1,000,000 bucks, now it's $700,000.
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  And what once was a four percent, 4% withdrawal rate, now
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  I might be withdrawing 7%. Now if I'm averaging a 5% return
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  and I'm pulling out seven, you can see that this thing's going
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  to snowball negative. So that's the sequence of of
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  withdrawals and sequence of returns versus if you're newly
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  retired and you're pulling out that 4% and the market's up 15%
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  and the next year it's up 10%, makes a huge difference.
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  And for those of you that are watching, you might say, well,
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  how do we avoid that? The simple way to avoid it is to
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  have a cash cushion on the side. In other words, if you've got
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  $1,000,000 and and you're pulling out $3000 a month as an
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  example, which would be a little more than 3 1/2% withdrawal
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  rate, but if you're pulling out 3000 bucks a month, that's
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  $36,000. Maybe out of that $1,000,000
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  portfolio, maybe you carve out 100,000 bucks and you keep that
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  safe and secure so that if the market were to go down, you're
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  not selling when the market's down, you're trying to recover.
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  Sure. But having that cushion might
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  make some underspend. So how can underspending be some
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  sort of issue? People might be fearful of not
• 8:28
  having enough money or running out.
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  How can underspending cause a problem?
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  I feel like is that your mistake #2.
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  Yeah, mistake number 2 is. That is.
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  That it mistake #2 to derail retirement would be
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  underspending because you're fearful.
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  Yeah, it, it, it does happen. I mean it, it does.
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  And I know I've made reference to that before.
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  It, it, it's, it's like you and I can't necessarily relate to
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  this. I can only share this through
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  the lens of clients of ours that have retired.
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  But we had a client of ours that retired very high income and him
• 9:09
  and his wife say just very, very nicely.
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  And they had Ross and they had Iras and everything was perfect.
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  We built out this beautiful financial plan.
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  And we talked last week about the guaranteed income. 85% of
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  their needs were covered by the guaranteed income that they were
• 9:24
  receiving between pensions and Social Security.
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  And so we met a couple of times and then he said, you know, I'm
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  just a little bit confused, but where does the income come from?
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  Like we still have to pull out about 2500 bucks a month.
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  And I know we've got a lot of money and you've already told me
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  that that's not a big percentage, but where's it come
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  from? And I was literally like
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  confusing, like, what? What do you mean?
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  Where does it come from? And he's like, well, when I
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  worked, I got a paycheck every two weeks.
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  And a part of that went into a savings, a part of it went into
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  a travel fund or separate savings.
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  And he said, we just spent it. But he's like here now all of a
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  sudden I'm retired and I don't have a paycheck anymore.
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  I have those guaranteed income sources that you pointed out,
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  which covers 85% of our expenses.
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  But what happens if my wife and I decide we want to spend 20,000
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  bucks and go to Europe? Where does that money come from?
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  And it never really resonated with me before because I just
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  thought we got this money and you're only pulling out 2%,
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  you're fine. But he was just confused.
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  And he's just like, where's it come from?
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  And so back to your comment about underspending, when people
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  make that shift from accumulating money, that they're
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  putting money in every single pay period into their retirement
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  accounts and then all of a sudden we shift it and you're
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  like, not only are you not putting money in, but you're
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  pulling money out. It makes sense that people are
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  fearful. And so it causes them not to
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  want to spend. And so I feel like for me, what
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  I try to tell all of our clients that are approaching retirement
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  is the number one thing that we're going to try to do for you
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  by building out this plan and updating this plan, you know,
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  every time we meet, because things do change, is we want to
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  do everything we can so that you don't run out of money.
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  And as we've talked about before, the biggest uncertainty
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  in building out these financial plans is life expectancy.
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  Because if someone only lives to 75 versus living to 95, that's
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  an extra 20 years that we have to keep the money thing going.
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  So for a lot of people making that shift of not contributing
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  to their retirement and they're actually pulling out, it scares
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  them. And so we share with them the
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  number one thing is we'll do everything we can that you don't
• 11:44
  run out of money. And then I always followed up
• 11:46
  with the number two biggest focus we have, which is a very
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  close second to number 1, is to encourage you to spend the money
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  and do the things you want to do while you're still healthy.
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  And and that sometimes is a harder sell than the overspender
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  because the overspender can look at the numbers and they can say,
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  yeah, you're right, I see we just need to tighten our belt a
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  little bit or maybe take a trip every other year.
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  But people that aren't used to spending and regardless of the
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  numbers we share with them, they're just not comfortable.
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  So I think that that that can be a mistake.
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  Sorry. Yeah, no, they've just had those
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  habits of monitoring and saving and saving and seeing their
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  money sit there and it's scary to take it out when you're not
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  putting anything in from a paycheck way #3 that you could
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  possibly derail Retirement has to do with inflation and maybe
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  not monitoring it or maybe ignoring inflation and how it
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  can impact you. What more do you want to share
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  on that? I, I would first state that
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  inflation is real. I mean, a lot of people don't
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  believe it, but it is real. And, you know, doing this as
• 12:58
  long as I have, I've seen it over the years.
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  But the reality, cami, is inflation's been pretty
• 13:05
  contained up until COVID. I mean, we never really saw a
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  massive inflation with the cost of goods going up year after
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  year after year. Yeah, sometimes it's 2 percent,
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  3%. But you know what, typically for
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  those that are in the accumulation phase, their
• 13:19
  paycheck would go up to to 3%. So it kind of match everything.
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  And then all of a sudden COVID hit and it was game changing for
• 13:25
  everybody. It's like I remember one of my
• 13:28
  Co workers here at the office, he's like, Oh my gosh.
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  He says just my wife and I, we went to Costco and he said, you
• 13:34
  know what, we used to spend 250, three, $100, you know, every
• 13:37
  other week he says we walked out there and was 450 bucks and he
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  says we got the same thing as we did two years earlier.
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  So that's inflation. And so not factoring inflation
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  in retirement is a mistake and we see it time and time and time
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  again. And what's even more challenging
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  is when you look at those guaranteed income sources that
• 14:00
  we talked about in an earlier episode, oftentimes pension and
• 14:04
  Social Security don't necessarily keep up with
• 14:06
  inflation and each pension is different.
• 14:08
  Of course, some of them do increase, but a vast majority of
• 14:12
  them can be they don't increase. So building out a financial plan
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  and saying we're going to spend $4000 per month and you keep
• 14:22
  that constant, you retire at 65. You know, you're literally
• 14:26
  talking about potentially 25 to 30 years.
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  And if you're not increasing that budget of $4000 per month
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  to factor in inflation, I think that's a big mistake.
• 14:37
  Yeah. So what I'm hearing is planning
• 14:40
  is so important in retirement and having that financial plan
• 14:44
  for those at home who maybe are monitoring their plan on their
• 14:48
  own, how often would you recommend that they double check
• 14:51
  things and look over it? Because sometimes it's maybe
• 14:56
  fear or I just don't want to look at it because it's scary to
• 14:59
  me. What would you recommend for
• 15:00
  them? I would say at a minimum once a
• 15:02
  year, I I think once a year just do a financial checkup well.
• 15:07
  That's doable. That sounds doable.
• 15:08
  Absolutely. And and it doesn't need to be a
• 15:10
  10 hour, you know, weekend exercise Cami.
• 15:13
  It could just simply be, you know, first thing I would do and
• 15:16
  I I've mentioned this the other day is, is take a look at your
• 15:19
  withdrawal rates, figure out the guaranteed income, figure out
• 15:22
  how much you're pulling out of your portfolio.
• 15:24
  Look at that withdrawal rate, compare it to your rate of
• 15:27
  return, see if things are going great.
• 15:29
  Obviously, your rate of return is going to change year after
• 15:31
  year, but look at kind of an average and a lot of that's
• 15:33
  based on how your portfolio is structured.
• 15:35
  Yeah, I would say once a year is probably realistic.
• 15:38
  OK. All right.
• 15:39
  Some good advice there. Anything more you'd like to add?
• 15:44
  I think when it comes to spending, I use this word often,
• 15:51
  but I think it's very applicable here too.
• 15:54
  And that is be intentional. It's very easy when you're
• 15:59
  retired to feel like you're, you're, you're just spending
• 16:04
  because you can. And I get asked the question
• 16:07
  frequently, should we budget to spend more money in retirement
• 16:11
  or less money? And my answer usually is a
• 16:14
  depends what do you want to do in retirement?
• 16:17
  But if you're going to spend time, you know, hanging out at
• 16:21
  stores and spending money because you never had time to do
• 16:24
  that in the past, then obviously you need to account for that in
• 16:26
  your budget. So just be intentional.
• 16:28
  Sure. All right, some good advice and
• 16:30
  ultimately retirement is something to look forward to, a
• 16:33
  great time in your life, and we hope that some of this advice
• 16:36
  will help you thrive in retirement.
• 16:38
  Thanks so much for joining us this week.
• 16:40
  We drop a new podcast every week.
• 16:42
  Wherever you get your podcasts, have a great day.
• 16:45
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