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Why Retirees with $1M Actually End Up With TOO MUCH · Retirement Answers

• 0:00
  Jacob: Most people heading into retirement have one overwhelming fear, running out of money. But here's what might surprise you. A huge number of retirees actually end up with too much money in the end because they spend less than they could and their portfolios just keep growing. And by the time they pass away, they've left behind a fortune that they never planned or thought was even possible. And this isn't because they necessarily wanted to, but it's because they were afraid to spend early in retirement when they had the chance to go and enjoy and do what they wanted with their time and their money.
• 0:29
  Hey, friends, welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host here as always. I'm a certified financial planner and the owner of a retirement planning firm where we help people just like you plan smarter and retire better. So as we talk about this idea of a million dollars being enough to retire and actually end up with way too much money one day, it's something that I see all the time.
• 0:52
  It's this pattern that I've kind of recognized over and over and over in conversations with people just like you who have just stepped into retirement. Let's say a couple of retires with a million dollars and then five years later, they get to where they have a balance that's higher than when they started. So they've gotten more than a million dollars at this point five years later. And it's not because they pick the right stocks or invested in the best way. It's simply because they did things well and they set up their portfolios and their allocations correctly to meet their income needs.
• 1:18
  And perhaps the investments had a better than average period of time over that five years. But really what's happening here is they're not spending enough money out of the fear of potentially running out in their eighties or nineties. So today, I wanna unpack why this happens and the psychology behind it, the math behind it, and how it can just sneakily or quietly rob you of the best years of your lives. The things that you've been waiting to do, you've been pushing off and living frugally so that you have the chance to do something in retirement, this is what we're talking about. And by the end of this episode, hopefully you will be able to find the balance between protecting your future and actually living life today.
• 1:53
  So let's start with what maybe you want to call the psychology of scarcity or scarcity mindset. Because for decades, what you've been wired to do is to save and invest and delay gratification, not buy that cool toy so that you have the opportunity to retire in the future. And to be honest, this is what got you to this point. You've done all the things well, you've done it right, so that you can have the even the chance to retire or have more than a million dollars saved up for this next phase of life. So you've done everything right.
• 2:20
  You've been disciplined and consistent and careful, but here's the problem, retirement flips everything that you've known and done, it goes on its head. So you go from saving your entire life and building and growing and accumulating wealth to spending from those very same accounts that you've built up over the last thirty or forty years. And this is just something that's very hard because it's not a switch that you can just flip overnight and say, oh, I'm gonna go from a saver to a spender, it feels wrong. I mean, it feels risky. It feels backwards to you in terms of how you've conditioned yourself to be.
• 2:52
  And really what happens here is decumulation, that's what you're signing up for. It feels really backwards or opposite to the way that you've come to know everything about money and growing money over time. And really just think about this as retirement spending anxiety. It's the sense of guilt or fear that comes to you every time you withdraw money out of your accounts, even if the math says that it's completely fine. And it's not just a handful of people, it's really the majority.
• 3:16
  The people that I talk with all the time, Jacob, how much can we spend? I'm not sure. Can I buy that extra truck? Can I do this? You know, in studies from Vanguard and JP Morgan and others, they show that retirees, they spend much less every year in retirement moving forward throughout retirement, not more.
• 3:32
  So even if they have the means to spend more, even when their portfolios continue to grow, they spend less. But why is this? Why do people who've worked their entire lives for this freedom end up living as though they're still broke? The answer that I found to this is not so much about numbers. It's not the fear of, you know, does the math work?
• 3:51
  It's really just a fear of feeling, a fear of the uncertainty feeling that comes in. All the unknowns, healthcare costs, market crashes, living longer than we expected to. So what do we do? We overcorrect, we underspend, we hoard cash as much as we possibly can because we think that our future self will thank us for it. But here's what gets really interesting, the data doesn't lie.
• 4:13
  Let me share something with you that most people don't realize. According to Vanguard's How America Saved Study, the median withdrawal rate among retirees is just a 3%, and that's well below the famous 4% rule. And while I have my disagreements with the 4% rule itself, the math behind the 4% rule does make sense, and what this is showing us is that even though you might have a million dollar portfolio and you could safely withdraw $40,000 per year from that, most people only spend $30,000 or even less on average. And the result, their account balances continually increase over time. So think about that, they've saved for forty years to enjoy retirement and then ten years in, their balance sheet looks better than ever, but their lifestyle perhaps hasn't changed.
• 4:54
  Maybe they haven't gone on that trip that they always wanted to go on. Maybe they don't pay for the family vacation every year. Maybe they aren't giving to their church or charity in the way that they'd hoped to. Now, don't get me wrong, caution isn't a bad thing. We don't wanna go crazy here, but there is a hidden cost to playing it too safe or overly conservative.
• 5:13
  Here's the truth, when you underspend in your 60s, you're not saving money, you're giving up time or opportunity or health for more certainty. And in my opinion, that's a bad trade because your 60s and your 70s, these are your best years to enjoy life, maybe the most healthy you'll ever be, maybe the best point or period of time for your vitality. And the problem is, is this window doesn't last forever. Maybe you miss it completely if you don't take advantage of it. I've seen and heard accounts of people that have retired at 65 and then they die by 70, right?
• 5:46
  And so they only had five years of retirement, but they worked all their life to try to save up for this potentially thirty year period of time. So the key here is this, I don't want you to always be preparing for the future and not taking advantage of what you have today. And I'll be honest, this isn't just about lifestyle because over saving can hurt your actual financial plan. It can increase your lifetime taxes, reduce your flexibility, or even shrink the legacy you leave behind. And here's what I mean by that.
• 6:14
  When you underspend your retirement accounts, especially your IRAs and your 401ks, just let those keep growing, that growth sounds good until RMDs or required minimum distributions start to kick in at either 73 or 75, depending on your year of birth. So let's say that you start with a million dollars at 65, and it grows by 6% a year, just using hypothetical numbers here. By the time you're 85, your RMDs could exceed over $120,000 per year. Now, you're paying higher taxes on that, possibly triggering IRMA surcharges in the future, reducing what you could effectively or efficiently leave to your kids later on down the road. So ironically, by playing it safe in your 60s and not spending money on yourself and doing what you want to do, it often means more taxes going to the IRS later in your 70s, 80s and 90s.
• 7:00
  So maybe here's a better approach. Use the early years of retirement before social security and RMDs fully kick in to spend, right? To do extra spending. I want you to go on the extra trip or do the extra thing. Use more of your money for yourself.
• 7:13
  And if you're not able to fill up certain tax brackets even by doing that, or maybe you've done all the things you want to do by year five, you know, of retirement, there's no need to just go spend money to spend money, that might be a really good opportunity to do Roth conversions. This lets you draw down your tax deferred accounts intentionally, you know, to spend on extra things. You can stay within certain tax brackets and do Roth conversions as well, and hopefully build tax free flexibility for you or your spouse in the future, but maybe more importantly, be able to leave a tax free or tax efficient inheritance for your kids or grandkids later on down the road. In other words, spending wisely is part of a good financial or retirement plan. Now, I wanna challenge you here to reframe how you think about enough, because that's a big part of this, right?
• 7:58
  Whenever we worry about, you know, overspending or running out of money, it always comes back to, well, how much really is enough for us to live and enjoy life? How much money do we need to start retirement with to have quote, enough to get through retirement? But what I figured out is this, regardless if you have you know, $500,000, a million dollars, $10,000,000, whatever it is, I've seen the same issue amongst all those different wealth levels. It doesn't matter how much money you have because enough is not a number, it's a feeling. So you don't automatically feel secure whenever you have a little bit more money.
• 8:33
  Let's say you have $1,800,000 today and a year from now, could have $2,000,000 Well, 2,000,000 versus 1.8 mathematically, it might make just a little bit of difference, but once you get to that $2,000,000 mark, you've just reset the threshold, you've reset the goalpost and say, now that I have $2,000,000, I wanna have $2,500,000. And if I go below 2,000,000 again, that means I'm gonna be panicking because I don't have $2,000,000 anymore. And that's why I always hesitate to say once you have X amount of dollars, you should or can retire because it's really hard to say that because again, retirement or the confidence around retirement is not so much about a number, it's about how you feel about it. That's why one of the most important parts about retirement planning isn't just running projections to see how much you can spend, it's actually seeing how much you can confidently spend, right? What do you have permission to spend and what are you willing to spend based on your projections and your budget you have for yourself?
• 9:25
  So when you can visualize that even if you travel more and give more and upgrade the home or take your kids on the dream vacation or grandkids, you know, does the plan still work? And once you see that something starts to shift, you go from guilt of spending into gratitude, you go from fear to freedom and from preservation to purpose and actually using it for what you want it to do. Maybe think about this as like your spending confidence zone, right? Like so maybe you establish the floor and the ceiling, let's say it's a $7,000 floor a month and then a $10,000 ceiling every month. If I spend within that on an annual basis, that can be called maybe what's your spending confidence zone.
• 10:04
  That's the sweet spot where you know you're okay, and you can finally enjoy what you've created and built with your money. Because peace doesn't come from just hoarding it, it actually comes from clarity around it. It comes from clarity around how to use it and spend it rather than just having more of it. So if you're listening and you realize you might be one of these people who's over saving and under spending, here may be a few practical things to think about. Number one, run a true retirement income plan, not just some simple projection, although it can be helpful.
• 10:33
  I want you to run a detailed look into how your money flows, what taxes you'll owe, and then how long it will last under different scenarios. If I spend $2,000 more a month every single year throughout my life, what happens if I get social security at 62 rather than 67? How does that adjust things? So run a true projection, something that has multiple scenarios built into it. And then secondly, I want you to say, what if I lived well now and just did all the stuff, right?
• 10:58
  I want you to run that scenario and say, I'm going to overspend early. And then I want you to have a separate scenario where you die with too much. Okay, and I want you to compare these two things. Maybe one is spending 12,000 a month and one is spending 6,000 a month. So you're double your spending in the live well now kind of scenario versus the die with too much, meaning you're underspending.
• 11:17
  I want you to run those two projections and see the difference between them. And what I want you to see is which one actually lines up with your values, and maybe the living well now scenario won't work mathematically, you know, as a percentage of success moving forward, but maybe there is some truth in it. Meaning, maybe we don't have to spend 12,000 a month in this scenario, but what if we spent 9? Right? What if we instead of sending 6 on the low end, we could spend 9 and be comfortable?
• 11:41
  Maybe that aligns more with your values and your purpose and what you want to accomplish. Number three, I want you to plan your spending around your most important or your early retirement years. Because again, this is whenever you have the health to go and do things. So it's kind of like you're front loading all the experiences and front loading the spending. And then later on, you're gonna be able to slow down a bit, but you can't get back these early years when you're most healthy and have the most energy.
• 12:05
  So think about maybe your retirement spending as a smile. Maybe you've heard this before, talk about it sometimes in my different pieces of content on YouTube, but also here on the podcast. If you think about a smile, it's kind of like a U shape, meaning you spend more money on the left side of the smile at the beginning of retirement, and slowly it starts going down, and you get to the bottom of the smile or the you, and that's maybe your 70s or 80s, right? You've slowed down a bit, you've done a lot of fun, and you spent more early on. And then on the back end, whenever smile starts to rise up again, maybe that's due to health care costs or long term care that you've got to pay for for yourself.
• 12:39
  Maybe you're spending increases in that time as well. So think about that as more of a realistic spending cycle throughout retirement, you spend more on the front end, less in the middle and perhaps a little bit more on the back end due to health care concerns or reasons. So that's a realistic spending cycle. And I see this all the time with my clients, they're typically are going to be spending less and less every single year. It's not because they want to spend less, it's because they simply don't have the desire or energy to go spend more or go travel to Europe again.
• 13:06
  And number four, I want you to revisit your investment strategy. I want you to think about how much money you need in the short term, how much money you might need a few years out and how much money you might need later on at 80 or 85 or 90. And so build out your bucketed investment strategy. I've got episodes on that. I'll try to link that in the description, but build out your investment strategy to meet your specific income needs.
• 13:27
  And at the end of the day, here's the bottom line. Retirement isn't about dying with the biggest account balance. It's about living your life while you have the opportunity to do so. No one gets an award for having the most money whenever they pass away. You don't get to take it with you, so might as well use it for something important or valuable to you.
• 13:44
  So if you've saved well, you've earned the right to enjoyment, don't let the fear of what if rob you of the opportunity to spend more time with your family, have more memories and opportunities with your spouse. That's what it's really about. And I hope that this encourage you to evaluate your plan and say, if we could squeeze out another 500 or $1,000 a month or go on that extra 10 or $15,000 vacation instead of just hold on to that money. So thank you so much for tuning into this week's episode of Retirement Answers. I hope you found it valuable.
• 14:12
  If it was, share it with a friend and we will see you next week. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.