2023 EP0715 | Financial Updates | How To Spend Money In Retirement

We want you to plan for success. Welcome to Planning Matters Radio. Peter, good to see you.

I really like today's topic. One of the toughest transitions in retirement is becoming a spender instead of a saver. Only one third of retirees are comfortable spending their retirement money. Most would rather live off Social Security pensions or income from part time work. We've spent hours talking through the strategies that address retirees biggest fear, which is running out of money.

But we haven't really touched on the other side of that coin. Don't hoard your money and compromise your quality of life. How do you help people get comfortable spending their nest egg?

Yeah, well, he or she who dies with the biggest pile of money is not necessarily the winner. But that pile of money is what gives us the confidence to spend and live the lifestyle that we envision. So we are getting into the psychology of money here. And money is math.

It's addition and subtraction and rate of return and percentages. But it is also very much mental, emotional and psychological. And what is not discussed as much nearly as the math side of money is the psychological transition when we enter into retirement. We move from being net contributors and savers and investors and accumulators of money building as much as possible to now being net sellers of assets, having to create income and distribution and withdrawals. And that is very psychologically different than when we were building our assets and had the income to provide for our bills and our standard of living. Now we see that account value a finite amount of money and we have an unknown duration of time that we need to make it last. So making even that first that very first withdrawal is a psychological change and can be a little bit unnerving for retirees.

And we have to have a plan to build confidence in order to be able to spend and enjoy our time. The same study by BlackRock found that a vast majority of retirees still had 80% of their pre-retirement savings after almost two decades of retirement. One third even grew their assets. Do those numbers surprise you? It surprises me a little bit, but that is a very confident kind of place to be. But let me tell you, even after 20 years, having a balance that represents 80% of your day one balance might feel psychologically unnerving. It may erode confidence. Now, if we can maintain that balance throughout our retirement, fantastic.

We're in good shape. But after 20 years, that same amount of money isn't worth what it was on day one of retirement. Again, most people in retirement are net sellers of assets, meaning they are making withdrawals. They are deducting from their nest egg.

So if we can build that nest egg and grow those dollars enough to maintain and generate that income, fantastic. But what we see is that number one fear of retirees is running out of money. And so people live a just in case kind of retirement. Well, I'm not going to take that trip just in case. Well, I'm not going to buy that boat that I wanted just in case. Well, I'm not going to do all the things that I envisioned retirement to be about. What if something happens down the road and then we see them not living the lifestyle because they don't have the financial confidence?

And guess what? Eventually the dollars pass to the kids and they do all the things that the original savers were afraid to do. They buy the boat, take the vacations within the first 12 to 16 months after receiving that inheritance. And I know you have an action plan to help people feel more comfortable spending their hard earned money. And the first one is to have a spending plan before retirement. You need to keep track of spending and figure out how those expenses might change in retirement. And then just to show you something which, again, may or may not surprise you, Peter. One quarter of people actually do not even have a spending plan.

I actually think that number is low. Most of the people who I talk to, if they are still working, do not have a spending plan because setting the alarm and showing up to work and earning the paycheck takes care of that part. And most of my clients, I will say, whatever you want to call it, are lucky or hardworking or blessed enough to earn a pretty comfortable kind of income, which is a fantastic quality and statement. But for that same description of person, generally they haven't had to pinch every penny or stretch every dollar. So they haven't paid as much attention to the budget necessarily. And for that same description of person, the transition of income when they walk away from the paycheck is that much more significant.

And the lifestyle that they are accustomed to is that much more expensive. So we do need that specific plan. We call it the optimized retirement plan.

It looks at a number of things. But number one is income. Income, investments, taxes, health care, legacy. We map out specifically how to make that transition and generate the income for the decades to come through retirement so that we can have that sense of confidence.

We can have that spending plan that gives us the guidelines for how much we can spend and yet maintain our ability to continue providing for the lifestyle that we are used to and accustomed to. Right. And you said the magic word there because that is step number two, assess your fixed income sources.

Yeah. And make the most out of them. Now when we talk about fixed income sources, we're talking about sources that are not required from our savings and investments, our personal assets and net worth. So generally we're talking about like Social Security and pensions here. Maybe a business partnership arrangement, maybe rental income, things like that could fall into this category. But generally we are talking about the sources that do not come from our investments and retirement accounts.

We need to make the most of those. And again, that's in that income category of of the optimized retirement plan. Sit down, strategize, because the more you can make out of those sources, the less strain and stress and reliance is placed on your personal assets, the more sense of confidence you're going to have. And we should also be able to identify what is living expense, net worth, and then what is discretionary investment and growth net worth. And by identifying that, even if it's only a portion of the life savings that we had accumulated up until retirement, by being able to identify that there are discretionary growth investable assets left over after the income plan, that is going to add a high level of confidence to a retirement. And when you do step one and two, you get your expenses and your income. Then we can set to step three, which is bridging that gap, which is also known as the retirement gap.

Yeah, a lot of people have not done this math of figuring out what is my income gap. This is step one, right? Step one in solving a problem is knowing that there is one.

Well, let's identify this problem is that most Americans are not going to live off of Social Security alone or their other fixed income sources. We are, in fact, at some point in time, going to be reliant on those investment accounts to generate some income to bridge the gap. And we want to do that in the most efficient, effective manner possible. We want to provide leverage for those income producing dollars. We want to generate the highest amount of sustainable cash flow to provide for our confidence and then again, be able to identify as much leftover discretionary investment capital as possible that is not responsible for covering our income and lifestyle expenses. And if we are able to do that, once again, Aaron, that's going to add an increase to the confidence level in retirement. It's all about peace of mind. Absolutely.

Well said, Peter. If somebody has questions about determining their income sources, their expenses and bridging that gap, what's the best way to reach you with questions? Yeah, give us a call at Rashawn Planning. Again, this is part of the optimized retirement planning process and the plan that you will get if you want to look over your situation and map out your retirement.

The optimized retirement plan covers income, investments, taxes, health care and legacy. And you can give us a call if you'd like to have a conversation or get that process started. Nine one nine three hundred five eight eight six nine one nine three zero zero fifty eight eighty six. Or you can go online. Rashawn planning dot com. It looks like rich on planning dot com because you don't get or stay rich on accident. But it's my last name, Rashawn Rashawn planning dot com. All right, Peter, thank you. Absolutely.

Aaron, thank you. This has been planning matters radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to take investment tax or legal advice from an independent professional adviser. Any investment and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooks own capital management. A registered investment adviser, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.