Episode 7 Budgeting for Ultimate Retirement

In this show, Mike and Amy discuss budgeting for ultimate retirement for military retirees. Mike and Amy cover: 

1. Why budgeting for ultimate retirement is critical (1:22))
2. Spending Buckets: Needs/ Wants (6:09)
3. Retirement income sources and impact on budgeting (10:28)
4. Role of Annuities (12:58)
5. Planning for other than day to day expenses (19:06)

Links:

Operation Retirement Readiness 

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Transcript

00:00:26 Mike: Hey, Amy.

00:00:30 Amy: Hey, Mike, how’s it going?

00:00:31 Mike: Doing well, how are you?

00:00:33 Amy: I’m doing well, just hanging in there with the, you know, weather here in Maryland and all that.

00:00:39 Mike: Ohh yeah. So I mean the last two episodes, we talked about budgeting basics and also about budgeting for military retirement, and that was great. I think we gave people a lot to think about along those things. And you know, I’ve said a couple of times that I’m not a huge fan of budgeting, you know, in general, but one of the times that I really think it’s useful is when you’re getting ready for ultimate retirement. So that’s what we’re going to talk about today is how do you come up with that budget? How do you make sure you have enough money? And you know what? What are all those things that go into thinking about ultimate retirements?

00:01:22 Amy: Yeah, I mean, we’ve talked before, I do like budgeting. I think it’s important, but I think that there’s no more critical time than making sure you understand what are reasonable expenses as you head into retirement, you know, financial planning doesn’t always have to be down to the nickel per se. The closer you can get to reasonable expenses as you head into retirement, the better the likelihood that you’re going to be able to enjoy that kind of lifestyle that you hope to enjoy.

00:01:57 Mike: Exactly. And it? And really, it’s one of those no fail budgeting exercises because the last thing you want is to be in your 80s or 90s and run out of money. Most 80s and 90 year olds are not, you know, in high demand in the workplace, so trying to get extra income at that point is going to be difficult. The only option really is to cut expenses or, you know, get help from typically family so you know it, it is. It is one of those very important things.

00:02:36 Amy: And what’s interesting is everyone saves their entire lives in order to be able to enjoy the retirement that they want. But a lot of the time, what I see is if someone hasn’t done their homework in terms of their budget and they haven’t sat down and looked at how things play out. For them, based on how much they expect to spend. They actually end up spending a lot less than they probably could, especially if we have a downturn in the market right away, people don’t want to spend their money and so they end up not having and not, you know, not being able to enjoy the lifestyle that they want early in their retirement and and you know it it it makes sense to do that. However, you have saved your entire life. So you should put a little bit of time and effort into figuring out what your retirement budget looks like so that you can go forward and have confidence knowing how much money you can take out of your retirement portfolio when you need to. And so you know that they said a lot there. Mike, do you have any kind of general thoughts about how to approach coming up with your retirement budget?

00:03:52 Mike: Yeah, I really like there’s some, some planners in Colorado that have a another podcast and talk a lot about retirement and are really, you know, have kind of latched on to some of their thoughts and, you know, the one one thing they they constantly say is you want to make that promise. That 85 year old, that future you that you’re not going to run out of money and so you know, determining the budget is you know key to doing that and they like to talk about you know a minimum basically minimum lifestyle expenses. So what are those key things? That you say this is this is the threshold, you know, not really willing to live below. And those are things like your house. Utilities, food, transportation and healthcare. You know, those five big things, big expenses and coming up with you know, what’s that level and it’s going to be different for everybody because, you know, some people have more money, so they’re going to say, hey, my minimum lifestyle is, you know. 150 Two $100,000 a year if they were high earners during their life, others it may be more modest and there you say, hey, I’m. I’m gonna have to mainly survive off my Social Security and that’s going to be closer to 60,000. For the year. But it’s really determining what that floor is and then you know, looking out, coming up with inflation, you know, numbers for those expenses and figuring out every year how much you’re going to need and then putting in place secure income. Which in my mind is Social Security. If you have a pension. And if not, you know, maybe some type of annuity that you know allows you to get a payout over time, you know that’s going to come in every month. So that you know what that money is going to be and you can budget it against those costs. Any thoughts on that or how do you typically Approach it.

00:06:09 Amy: Yeah. Yeah. I mean, for sure, there’s always the bucket of money that you have to have and it’s usually along the lines of your needs. So you’ve got to eat. You need to have a way to get around. You need to have A place to. You need clothes and then on top of that. The basics are sort of the ideal. You know, you probably don’t want to eat cat food in retirement, so budgeting enough money for the kinds of. Food that you like to enjoy, whether that’s food at home or food at nice restaurants or casual restaurants, and then on top of that, and this is what’s interesting. So you know you’ve talked a little bit about the basic needs we both have to some degree. But how do you figure it out? sort of. The lifestyle piece of it. So meaning if I’m a golfer and I really enjoy golf, how do I? Plan for my golf expenses and sort of those lifestyle expenses that I want whether it’s travel, being able to you know. Travel for leisure or travel to see my family and you know, kind of things like that. And then also sort of trying to plan for the things that are so nebulous, like healthcare. How do you anticipate healthcare expenses? So that’s that. But I guess the key take away. Question for you Mike, is how do you figure out how much all of that is?

00:07:49 Mike: Yeah. I mean, I hit on a little bit, but again it’s really diving into you know it’s either working with somebody that can help you figure it out or it’s getting specific on you know how much you expect to spend. And then looking at you it’s, it’s on Google statistics on how much healthcare inflates. Each year and you know, again building that into your plan and. And you know, tying some type of secure income, hopefully that’s inflation index, which Social Security and for a lot of our listeners, military retirement that’ll go up each year with CPI Now you know there’s there’s. That probably doesn’t totally track with what your expenses are going to be. Some of these things are going to go up faster, you know, potentially healthcare or we’ve seen housing go up pretty significantly recently, So you know whether it will truly keep track of what your expenses are, but it’s a good, good proxy and then you can, you know, earmark a little bit extra and then really you know, are there other things that you want to take care of like you know a legacy? To family or charitable giving, or those other things, and you gotta pull those things out of that big bucket of money that you save and, you know, set it aside because you can only. You can only spend a dollar once, and so it may look that big. Big nebulous bucket and everything is going to come out of there, but like you said, sometimes people get freaked out because they haven’t really earmarked each of those dollars to say where it’s going and then get concerned and won’t spend. So coming up with those categories. You know the Nice to haves also is kind of the second step of the exercise and You know, make sure that you’re not just deferring and are concerned that you can’t spend when you do have enough money. So any thoughts around there when people you know are concerned and you know don’t don’t spend and then end up with millions of dollars when they. You know, kind of reach that slow go or no go phase.

00:10:28 Amy: Yeah. I mean, I think I think people have to be really realistic about how much time and effort they’re willing to put into this analysis. So and what I mean by that is, you know, there is a lot of complexity going on here. So we’re talking about different expenses inflating at different times we’re talking about. How the market might react, meaning how big your portfolio is. You talked about having a baseline level of sort of secure income. But you know, it’s nice to have the floor, but it’s very difficult to figure. Out what is. The real number, if we take into account inflation, what is the real number that we need to plan for? And so that’s why, you know, there’s folks that rely on their financial planner and financial planning software. To do those kinds of estimates, there’s the folks that love spreadsheets and they’re not afraid to get into their favorite spreadsheet software and. Filled calculations to try and get their arms around this. This kind of information. And then there’s other people that are using online calculators which are hopefully not too one-dimensional. But I mean that’s the biggest challenge in all of this is just the complexity of estimating how fast expenses are going to grow. Because there’s there’s different rates for different expenses. And then on top of that, what, how fast is your income going to grow? So Social Security typically gets, you know, stays pretty close to the cost of living. So very similar. Some pensions keep up with inflation, so military pensions do government pensions and private pensions generally. Not annuities typically do not keep up with inflation. There’s there’s some riders that you can put in there where potentially it might go up a little bit, but there’s a cost for that. So it’s just a lot. And I think that people have to be really honest about their willingness to dig into the details. So you know, it’s not just a budget discussion. All the time. But that’s certainly where it has to. Start if that makes sense.

00:12:45 Mike: It definitely does. So you hit a little bit on the annuity piece and these can be polarizing. What are your general thoughts on using annuities?

00:12:58 Amy: Yeah, I mean, so like you said, they can be polarizing in general. I think that, you know, one, they depend on the person’s sort of risk tolerance.And two, they depend on the use of an annuity depending on whether the person has legacy goals. It depends on their age. It depends on how comfortable they are with understanding how annuities work. You know in general, because I work. With, you know, military folks who have pensions or other folks who have pension. In general, it’s not the first place that I go. An annuity isn’t the 1st place that I go. The other consideration like I mentioned is the legacy planning because one of the downsides of the annuity is you know it’s important to understand if you buy an annuity, let’s say you take whatever’s in your first savings plan and you buy an annuity. That money is not yours anymore. It’s the insurance companies money. You’ve traded that for a contract with that company, and that company has agreed to pay you a certain amount of money over a certain time frame under different parameters. So you know you, unless you put different sort of characteristics in that annuity, there’s a good chance that the money is gone. It’s not going to go to your beneficiaries unless you elect certain characteristics that would allow that to happen. And you’re going to pay for that. So I just think they’re very complex and I think their use is important for certain clients. But I definitely think that anybody who intends to use an annuity should speak with a fiduciary advisor who is not selling annuities. For a Commission to determine how an annuity can support their plan.

00:15:07 Mike: Yeah, all great points? Yeah, they’re definitely within the advisor’s space. You know, some people love them. Some people hate them. But you know, the kind I like in general are the single premium immediate annuities, also called Spears. Basically, when you decide that you do need extra income and you, you know you’re not worried about it. Money for legacy or you just know I have this income needed for the rest of my life. And you know you have a bunch of money. You just want to give it to the insurance company and they’ll give you money over time. Those can’t be useful. Like you said, if you’ve already got a pension and Social Security. May not be applicable. You may have enough income coming in and are comfortable living off your knowledge of the rest of your portfolio and just just spending that as needed. But if you don’t have that pension, sometimes having that you know, guaranteed money coming in. Is nice, especially as you get older because you don’t want to worry about having to, you know, manage the portfolio if you’re doing it yourself or so. So those are some times where it definitely can be useful, but you know they are complex. There are a lot of different flavors out there, some you know. More useful, I’d say than others just because of expenses and things like that. So and like you said, get some help if you’re thinking that you need to buy an annuity and make sure you understand what you’re looking at.

00:16:59 Amy: Yeah, yeah, especially. And particularly getting help from somebody who doesn’t have, you know, have conflict., they’re not compensated if you do buy an annuity, you know, there’s plenty of space for everyone. But Just making sure that your plan is best served by a specific strategy or product is a great way to go just to make sure that you know you’re getting what you want. Out of your out of your retirement, whether that is security in the form of a pension or annuity, sort of that guaranteed, the guaranteed income streams that that you’ve talked about like to at least cover those basic expenses and then look at how you can handle that, the add-on things, the Nice to have. Kinds of things.

00:17:56 Mike: So Speaking of the Nice to haves or other other kinds of buckets that people might think about as they approach retirement, what are some things that you know we hit on a couple, but what else do you typically see people you know kind of earmarking money for?

00:18:12 Amy: Yeah. A common thing that I see for those folks who have kids or grandkids or nieces or nephews is legacy planning. So wanting to pass wealth on or some amount of money on to friends and family, there’s folks who are charitably inclined. So they have certain charities that they would like to take care of. And some you know, sometimes that’s good to do while you’re alive. Sometimes it’s good to know when you’re when you pass away and then just those goals that are part of your retirement vision, a lot of clients that I talk to want to travel when they retire For enjoyment. So it’s all of those kinds of things.

00:19:06 Mike: Yeah. And they’re all they’re all important. And they all vary from person to person. So you know what? What’s important to one person may not be important to another. And, you know, we could probably do a show on each of these things and. And, you know, maybe we may do in the future. You know, the one other thing that people need to think about is long term care as they’re approaching retirement and you know, are they going to insure for that or are they going to self insure and you know how much money do they need to set aside? To again make sure that toward the end of their life, if they need that assistance, that it’s available and they have the money to pay for it. So all in all important things and So anything else we need to hit on any other big thoughts around retirement budgeting?

00:20:13 Amy: You know, nothing new, but just to to go back and reiterate the point that we’ve made in in all you know the last couple shows and earlier in this show is is is agonizing as in an uncomfortable as it can be to sit down and get a budget together and just. Understand where your money’s going and whether or not the money’s going. The places that you want it to go in line. With your goals. For retirement, getting that worked out is the first step. It is a critical step in sort of understanding. What? How your retirement may unfold and what strategies you should employ to give yourself the best chance of being able to realize the kind of life that you’d like to live from. Not, you know, not just the first five years of retirement, and not just the last five years of retirement, but throughout retirement.

00:21:11 Mike: Yeah, And you know that that really is a challenge. If you knew, hey, I’m going to die here. And if you’re married, their spouse, you know, they’re going to die here. This. This isn’t a hard exercise at that point because there’s an end date problem. With retirement, typically you don’t have an idea of when that end date is going to be and what’s gonna happen in between. So it’s a challenging exercise, one filled with, you know, a lot of. It’s an angst is probably a good description when you’re first starting out to, you know, make sure that you’re you’re not. You know you’re gonna have enough money for that future self, and they’re they’re going to be taken care of, even though there are many, many, many unknowns about what will happen between when you stop working and. Yeah. When you actually die. So it’s probably, you know, college level planning versus when you’re in the accumulation phase that’s probably more like junior high or high school. Planning. You know, it saves more. Invest more than that type of thing in general. But once you get into spending it, it becomes a whole lot more challenging.

00:22:46 Amy: Yeah, yeah, exactly. So a lot of a lot of complexity here, you know, retirement. I’m not in full retirement, but retirement can be, you know, some of the best years of your life and the ideas to just be as prepared as possible for those years.

00:23:08 Mike: I think that’s a great way to sum it up.

00:23:11 Amy: Well, it was good chatting with you today, Mike. I look forward to talking with you again soon.

00:23:16 Mike: All right, take care.

00:23:17 Amy: Take care.