Episode 008 – Spending In Retirement

In this show, Mike and Amy discuss various spending profiles in retirement.  A spending profile is a framework for how to think about retirement spending. Mike and Amy cover: 

1. Percentage of pre-retirement spending plus inflation (2:02)
2. The Retirement spending smile (3:17)
3. Go Go; Slow Go; No Go Phases of Retirement (8:56)

Links:

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Transcript

00:00:33 Mike: Hey, Amy, how’s it going?

00:00:35 Amy: It’s going well, Mike. How about you?

00:00:37 Mike: Ohh doing well. I know it’ll be a little while till our listeners hear this, but I just got back from a ski trip in Whistler which was fantastic. It Has been about 10 years since my buddy and I have been talking about going there so it was great to actually get there and ski.

00:00:58 Amy: Those are great trips to take, especially when you’ve been planning. Well, it’s good to have you back. I’m happy to jump back into our podcast. What are we talking about today?

00:01:13 Mike: Well, in our last podcast we talked about retirement budgeting and getting ready for retirement and we got a couple of questions about that. People wondering, you know, what does a typical spending profile kind of look like over, you know, a 20-30, maybe even a 40 year retirement. And so today we’re going to talk a little bit about how people can think about as the spending typically goes up during retirement. Down. You know how. How should people think about that? So that’s what we’re talking about today. What do You generally think or what are some of the common approaches that people might take when they’re thinking about, you know, spending profile in retirement?

00:02:02 Amy: Yeah. I mean, I think the most straightforward approach that people think about, I would say almost everyone immediately defaults to just sort of setting a percent of pre retirement spending. So how am I living today? How do I think I’m going to live in retirement? A lot of people and there for a long time there was sort of a rule of thumb that said that you were going to spend less in retirement because maybe you bought fewer business clothes, you were driving less. I did not entirely sure that’s true so I think that, you know, rule of thumb has gone, by the way. But I think the default is that people say I’m going to spend about the same or a little more or a little less than what I do now. And then inflation is going to have a say. So we’re just going to inflate it, we’re going to inflate that spending number over time. Now the downside there is that. Your expenses may change and you might not be a realistic representation of what you do. You know Mike, what are your thoughts around this? I know it’s common. It’s a common approach. What do you think about it?

00:03:17 Mike: I Mean. I think it’s good. I mean it’s a good starting point and you know we talked the last couple episodes about budgeting and it’s really good to understand how much you’re spending. You know as you approach retirement and really dialing that in. And then seeing what of those expenses are going to continue, maybe stop. Like you said, maybe work and eat and lunch out every day is not going to happen anymore. So that can reduce your budget. But maybe going to travel more so maybe that increases your budget. It’s a good starting point, but it’s hard. Over, you know, 20-30 forty years to really be able to figure that out. So you know, researchers have looked at this, there’s been a, you know, one one thing they’ve come up with is what they call the retirement spending smile. Where really what? What they see in the data is whatever your initial spending is. You know, when you start retirement, it will actually decrease over the next 10-15 years. Say we’ll say you got a 30 year retirement. So maybe you know over the 1st 15 it just steadily decreases a few percent. The year till it’s first 15 years. And then it starts to climb again. As you start, you know, having medical issues, that’s typically what folks see, or maybe you need additional healthcare or, you know, home care or you go into an assisted living facility. So you’re toward the end of life. It can go back up. So it kind of makes that. You know Amazon smile kind of graphs your expenses overtime. What are your thoughts on that? Have you heard that?

00:05:11 Amy: Yeah, I definitely have. And I think that approach is a little bit more accurate in terms of, you know, just just what you know we see when we work with clients. We actually see that that data plays out and like you said in terms of using the simplified formula it could. Kind of result in maybe over saving because people. The projection is that you’re just always going to increase savings and we really don’t see that. So it’s a good idea to try and More closely approximate spending so that people can enjoy their money sooner. Now in terms of, you know, planning and how people think about things. You know, I always tell people who are heading into ultimate retirement who are worried. What I see when I watch people cross from getting that paycheck to either getting a smaller pension paycheck or no paycheck. That the first several months, maybe even for several years like it’s a shock to the system. So they do stop spending, you know, not necessarily by choice, but just because it is mentally difficult to look in your checking account and not see the same paychecks that they have been hitting for. You know 20-30-40-50 years and to see your checking account go down and to wrap your mind around the idea of spending. So it’s kind of interesting to watch, but then it kind of levels out. So I don’t know if that’s if people do that on purpose or if it’s just a subconscious thing, so I’m not. I’m not really sure.

00:07:04 Mike: You know, I think, I mean, I think it’s just human nature that you know, you’re so used to that money coming in. I mean, I know in retirement, you know, still get the retirement check, but we’re starting the Bush. Yes, I had less money coming in and it was putting money into the business and stuff and and you know, the savings going down and yeah, it’s quite shocking as somebody who’s been building for you know, 20-30 years and so. So, yeah, I I can definitely see. That just to throw some, you know, kind of numbers around well, how much of A reduction it’s in the data, you know researchers have looked and say you start with the baseline of $100,000 a year in your retirement spending, it can drop down, you know over that 10-15 years to, you know maybe around $75,000. Again, this is all the constant dollar. So with inflation, you know, it may be more like you’re spending $100,000 every year, you know, adjusted for inflation, but You know, it may like you said, result in over saving if if folks you know do follow this pattern but have been projecting that they’re going to be increasing their spending every year. Freak out at 1st and then you know, settle into. OK, I do have the money that I’ve saved and I’m just going to have to get used to. Yeah, it’s going to go down some.

00:08:36 Amy: Yeah, I mean, so there’s you know, so, so far there’s two ways, right. There’s like, the simple sort of we start with a number and we adjust it for inflation forever. And then there’s the spending smile and then, you know, what about some other, you know, one or two others, Mike.

00:08:56 Mike: One other way that a researcher named Michael Stein, I think he was actually a planner, came up with and coined the phrases he. Go Go slow Go and no go phases of retirement and it’s, you know, similar to the smile. But the three distinct phases as you go through retirement. So Amy, you want to hit go, go and what that typically entails.

00:09:26 Amy: Yeah. Yeah. So you know we sort of alluded to this idea that you may not spend less money in retirement, but you might spend more. And that might be particularly true in your early years. And you know, for simplicity, let’s just split up your retirement years into third. So like the first third of your retirement years, you might be doing all the things that you didn’t get to do while you were working. So you’re traveling more. Maybe your kids live elsewhere. Maybe they’re starting their families and you want to be. Part of that. So you’re traveling there, you’re buying new grandkids, things you’re, you’re. Active. So maybe your hobby is spending more hanging out with friends, and that often involves going out to eat, so it’s just catching up on doing things you’re healthy and you want to go. So that’s kind of how that is. But then the next phase, Mike, is the slow go phase if you. Want to talk about that?

00:10:27 Mike: Yeah. So this is one, you know you’re getting older. It’s not as easy to take that across the pond airplane flight. So you may not be going to Europe or Asia, you’re just starting to slow down. You’re, you know, older. You start having health issues, maybe your spouse starts having health issues and you’re just not able to do it. All of those things that require spending, you may still be active in your Community, volunteering, doing those types of things. But those big expenses that you had early in retirement are reduced. And I’ve definitely seen that with both my in-laws and my parents that, you know, just as they get older. It’s not as easy to hop on the plane and fly out to either, you know, travel, or even to go see family. So yeah, it’s just, you know, reduce spending because you’re less mobile as you go. So then, Amy, what’s the third phase? The No go phase. What does that entail?

00:11:42 Amy: Yeah. So that’s, you know, usually sort of the last third or the last several years of your retirement where you know you may not be feeling very well. You know a lot of your time is spent on taking care of yourself, literally taking care of yourself. You’re probably not traveling very much if you are, you’re not. Going far from home. So we’re not talking about plane trips around the world. Those are just really hard on anybody, but especially an older body.

You might be only leaving your house to do the basics, so groceries, medical appointments. You know, it sounds like, you know, this might be the least amount of spending, but this might also actually be the most amount of spending that happens because in your no go years, maybe you’re in a retirement community. With some varying amounts of care, whether assisted living or full nursing nursing home support so that it can get expensive even if you stay home, you might have to buy additional medical equipment or retrofit your home so that you can stay in your. So it’s a phase where you’re not doing a whole lot, but it still may result in increased spending. So you know, we talked about 3 three ways to plan for spending. You know, what are your general takeaways summarizing this podcast?

00:13:16 Mike: Again, it goes back to the understanding and and and really you know the first phase of retirement and then the end of life is kind of going to be the most expensive piece. There’s probably going to be some time in between that is lower. So just really understanding that and budgeting for it and understanding that may allow you to even retire earlier? Or if you’re, you know, confident that you know this is, this is how, you know, my plan is going to go if you’ve got possibly long term care insurance. So you’re not worried about the end of life, you know, type of increased expenses. You’re good there. If you can make a realistic budget for the first. You know, 10 plus years of retirement or. That can, you know, allow you to maybe retire 15 years early. So it it it’s again just just focusing on.

What do you want to do? Having a realistic budget and then understanding that it may not be, you know, up and to the right all the time for your spending in retirement, just because you will have these phases where it’s harder to do things and. And you just. Have less energy or just don’t have the health to actually do it.

00:14:52 Amy: Yeah. And I think that, you know, depending on your current age and how far away you are from retirement, as you think about how to plan for retirement, you know the most conservative way is is the the first one that we talked about where you know you just assume that your expenses are going to stay at least the. Name and you inflate them over to. Time that might be if you’re only in your 40s and you’re still 20 years away from retirement, from full retirement, that might be a great planning factor. But as you close in on the last 5:00-ish years before retirement, it’s time to be really honest with yourself about how spending might go for you so that you can have a really good solid plan. And make sure that you’re fully funded for the kind of life that you want to have throughout your retirement.

00:15:44 Mike: Yeah, that’s yeah, that’s that’s a great point. And it’s like we’ve talked about, it’ll vary based on your length of retirement. If you’re retiring early, you know, say 55 you’ve you’ve, you know, made a lot of money or don’t need a lot of money to live on. You know, you may be 20 year. Go go phase and with improvements in healthcare and drugs, you may have that very long first phase. Now if you wait and you don’t retire till you’re 70. You know, it could be shorter, so just understanding again when and your health and all those things and factoring them in are, you know, critically important to coming up with that realistic budget for retirement.

00:16:35 Amy: Yeah, exactly. Well, hopefully if you’ve made it this far, this information has been really helpful to you. If you have questions for us or topics you’d like for us to cover.

Drop us an e-mail at [email protected].

00:16:53 Amy: Mike, until next time it’s been great to talk with you and we’ll see you again soon.

00:16:58 Mike: All right. Take care, Amy.