Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Speak to any financial advisor and they'll tell you one
Speaker 2: of the biggest challenges they have professionally is getting clients
Speaker 2: to actually spend their money. After decades of working and
Speaker 2: saving and investing, making the turn to spending money can
Speaker 2: be a challenge. I'm Barry Ritolts, and on today's edition
Speaker 2: of At the Money, we're going to discuss spending your
Speaker 2: mollah in retirement. To help us unpack all of this
Speaker 2: and what it means to your retirement, let's bring in
Speaker 2: Christine Benz. She is the director of Personal Finance and
Speaker 2: retirement Planning at morning Star. She's published numerous books on money,
Speaker 2: investing and retirement, most recently How to Retire Twenty Lessons
Speaker 2: for a Happy, successful, and Wealthy Retirement. So let's start
Speaker 2: with the basic problem. Getting those type A personalities who
Speaker 2: are used to working and saving and working and investing
Speaker 2: to kind of pivot to working and spending is a
Speaker 2: big challenge. How big of an issue is this amongst
Speaker 2: people who are looking at retirement.
Speaker 3: It's a very big issue, and it's kind of a
Speaker 3: difficult topic to talk about because we have a lot
Speaker 3: of people in our society who are quite undersaved relative
Speaker 3: to what they will need for retirement, they'll be exclusively
Speaker 3: dependent on social Security. But there is also a segment
Speaker 3: of our population who struggles with spending appropriately. I can't
Speaker 3: tell you, Barry, how many times I've been out speaking
Speaker 3: to a group of older adults and I'll have someone
Speaker 3: come up at the end of one of my sessions.
Speaker 4: Clearly his or her eighties.
Speaker 3: Usually his based on the composition of the audiences I
Speaker 3: usually speak with, and he'll proudly say, I only spend
Speaker 3: two percent of my portfolio per year, whatever the value is,
Speaker 3: that's what I spend. And I kind of think to myself, well, gosh,
Speaker 3: I hope that that delivers you a good quality of life.
Speaker 3: And I also think to myself, you're probably pretty significantly
Speaker 3: short changing yourself if you're just spending at that level.
Speaker 3: And as you said, Barry, I hear this from financial
Speaker 3: advisors as well, that they struggle getting their clients to
Speaker 3: spend appropriately.
Speaker 2: I heard a funny line from a pair of older
Speaker 2: clients who were getting on a plane and they were
Speaker 2: sitting in first class and they bump into friends they
Speaker 2: know who are sitting in coach, and the conversation was
Speaker 2: they just could imagine each other's conversation. Look at them
Speaker 2: in the front of the plane spending their kids' inheritance,
Speaker 2: and then the one sitting in the front of the
Speaker 2: plane saying, can you imagine their flying coach so their
Speaker 2: kids can fly first first class. It's kind of funny,
Speaker 2: But ultimately, isn't this a psychological struggle about not just
Speaker 2: outliving your own money. Assuming we're talking about people who
Speaker 2: aren't going to outlive their own money, there's still this
Speaker 2: enormous hesitancy to spend their kids inheritance or to spend
Speaker 2: money when they've spent their whole lives. As Savers tell us.
Speaker 3: About that exactly, it's a sense of identity. I think
Speaker 3: that one builds as a saver and an investor that
Speaker 3: you are someone who defers gratification. You set money aside
Speaker 3: each month, and the further you go along in that journey,
Speaker 3: probably the more successful you are, you get to see
Speaker 3: the incredible power of compounding. I think there is a
Speaker 3: common tendency to kind of anchor on the portfolio Leo's
Speaker 3: high water mark, to think, well, if it's here, I
Speaker 3: never want to see it go lower. It just does
Speaker 3: not feel good to see the balance go down after
Speaker 3: a lifetime of seeing it generally escalate. So there's a
Speaker 3: lot going on psychologically, and kind of an elephant in
Speaker 3: the room in this respect is long term care. That
Speaker 3: people who have not purchased long term care insurance and
Speaker 3: may have really good reasons to not have done so,
Speaker 3: still have this risk of like, oh, may I have
Speaker 3: this balloon payment at the end of my life where
Speaker 3: you know, I could get stuck with years and years
Speaker 3: of expensive care. So I think that that is a
Speaker 3: real risk factor that is in the mix as well.
Speaker 2: Really really interesting. So since we're talking about long term care,
Speaker 2: let's talk about generally putting together a personalized plan, thinking
Speaker 2: about needs and goals, lifestyle considerations. What should someone who
Speaker 2: wants to spend more of their money do in order
Speaker 2: to feel comfortable that they can afford to spend the
Speaker 2: little cash?
Speaker 3: Well, I would say, either get a financial advisor to
Speaker 3: help you with this, where they're effectively disbursing a portion
Speaker 3: of your portfolio to you per year if you're doing
Speaker 3: it on your own, get familiar with the research on
Speaker 3: safe spending rates. A lot of the research that's been
Speaker 3: done by our team and Others points to the value
Speaker 3: of being flexible with your portfolio withdrawals, where you are
Speaker 3: taking more when your balance is up when the markets
Speaker 3: are up, and you're taking a little bit less when
Speaker 3: things are down. I think if people understand the data
Speaker 3: that we have on retirement spending, one thing that we
Speaker 3: know is that people tend to spend less as they age.
Speaker 3: So your early years of retirement should be the higher
Speaker 3: spending years of your retirement because that's usually when people's
Speaker 3: health is good. They may have pent up demand to
Speaker 3: do travel, they may be launching adult children, a lot
Speaker 3: of things going on at that life stage.
Speaker 4: You should give yourself permission to spend.
Speaker 3: A little bit more early in retirement with the knowledge
Speaker 3: that even when we look at spending trajectories among very
Speaker 3: wealthy households, people spend less as they age. So if
Speaker 3: you're okay with that trade off, with the idea that
Speaker 3: you probably will spend less, you should give yourself a
Speaker 3: little bit more license to spend earlier on.
Speaker 2: So let's break those spending desires down. You mentioned travel,
Speaker 2: like it's easy to travel in your sixties and seventies
Speaker 2: than it is in your eighties and nineties. Hobbies legacy
Speaker 2: philanthropy or charitable goals, to say nothing of future healthcare needs.
Speaker 2: How should people organize their thoughts and planning for future spending.
Speaker 3: Yeah, I think it's helpful to get very granular about
Speaker 3: the budgeting. And I don't mean you know that you're
Speaker 3: nickel and diming yourself and looking at every line item.
Speaker 3: But if you have, say a big family trip planned
Speaker 3: in year two of your retirement, spend some time figuring
Speaker 3: out what the implications will be for your plan for
Speaker 3: your spending in that year. Know that those big outlays
Speaker 3: won't occur every year, but actually spend some time mapping
Speaker 3: them out.
Speaker 4: And the nice.
Speaker 3: Thing about that is that, in addition to it helping
Speaker 3: your spending plan, it will also help you get these
Speaker 3: plans off the ground, rather than having them as some
Speaker 3: you know, sort of vague notion of things that you
Speaker 3: want to do. You mentioned lifetime giving, barry to family
Speaker 3: members and charity. I have come to be a huge
Speaker 3: evangelist for this because when we look at the data
Speaker 3: on when people inherit money from their parents, they're usually
Speaker 3: in their fifties or in their sixties. They're findingential fortunes
Speaker 3: are pretty well set by that life stage, Whereas if
Speaker 3: you have young people in your life, whether children, grandchildren, nieces, nephews,
Speaker 3: you can make a big impact for them in the twenties,
Speaker 3: thirties forties with hometown payments or paying off student loans,
Speaker 3: and these don't need to be big ticket gifts. Smaller
Speaker 3: gifts can make a big impact. I often talk about
Speaker 3: how my mom and dad gave my husband and me
Speaker 3: a little bit of padding for our home down payment
Speaker 3: on our first home, and that helped us get into
Speaker 3: a home that we were able to stay in for
Speaker 3: twelve years. We lived exactly in the community where we
Speaker 3: wanted to live. So having that discussion with your loved
Speaker 3: ones about the gifts that might help them, I think,
Speaker 3: is something that can add a lot of richness to
Speaker 3: someone's retirement.
Speaker 2: I recall reading your piece what was it in the
Speaker 2: fall last year or maybe around the holidays? Intervevos transfers
Speaker 2: is the technical time while you're alive. This seems to
Speaker 2: be increasingly modern development. Like I think back twenty five
Speaker 2: thirty five years, you didn't hear that much about it,
Speaker 2: at least outside of the top one or five percent.
Speaker 2: Now it's fairly common for the X or boomer generation
Speaker 2: to help with a down payment or college. As you mentioned,
Speaker 2: tell us about what you're seeing out in the world.
Speaker 2: How significant has this become? Is this something around the
Speaker 2: fringes or are we seeing a lot more intervivos transfers
Speaker 2: today than say, twenty thirty forty years ago.
Speaker 3: I don't have any data on it, Barry, but my
Speaker 3: sense is that the movement to toward lifetime giving is
Speaker 3: picking up steam, and not just for very wealthy people.
Speaker 3: I think sometimes people are put off by the term
Speaker 3: lifetime giving. It sounds very highbro, but it doesn't have
Speaker 3: to be. It can be assistance with some of those
Speaker 3: smaller life achievements that young people might might want to
Speaker 3: tick off their lists. So I would urge planners and
Speaker 3: individuals pursuing their own retirement plans to think about building
Speaker 3: in some of those lifetime giving aspirations. And also, you know,
Speaker 3: there are really nice tax planning mechanisms that people can
Speaker 3: use to help them achieve achieve those things as well.
Speaker 3: The donor advised fund for charitable gifts especially.
Speaker 2: And why shouldn't you see family members, friends, whoever enjoy
Speaker 2: the benefits of your largest while you're still around it
Speaker 2: shouldn't be just something you think about when you're at
Speaker 2: you'r a state attorney and you're signing a document and
Speaker 2: that's the last you see of it. Why not get
Speaker 2: to enjoy your kids or nephews or whoever in a
Speaker 2: new house that you help them get there exactly.
Speaker 3: That is the huge side benefit of contemplating lifetime giving.
Speaker 2: So let's talk about a little more formal type of giving.
Speaker 2: You mentioned donor advised funds. Philanthropy when it comes to
Speaker 2: both financial and estate planning. I'm going to say that again,
Speaker 2: philanthropy is a big part of both retirement and estate planning.
Speaker 2: Talk a little bit about the idea behind how families
Speaker 2: should be thinking about managing philanthropy or donating to causes
Speaker 2: that are near and dear to their heart.
Speaker 3: Yeah, get some advice on the tax aspect of this.
Speaker 3: The donor advised fund is a really nice mechanism for
Speaker 3: people of varying means, and it's especially appropriate for people
Speaker 3: who have concentrated positions in their portfolios. Off an employer
Speaker 3: stock where you can kind of take a risk out
Speaker 3: of the portfolio and donate the say employer stock to
Speaker 3: the donor advised fund and get a tax deduction on
Speaker 3: that contribution, and you can also remove the capital gains
Speaker 3: tax associated with that big gain in the position at
Speaker 3: the same time. And then from there on, once you've
Speaker 3: established the donor advice funds, you can make those charitable
Speaker 3: gifts on an ongoing basis. So that's one strategy that
Speaker 3: I would say would be kind of a first line
Speaker 3: to consider for people of all levels of wealth. And
Speaker 3: then for people who are moving up and getting into retirement,
Speaker 3: using the charitable Qualified Charitable distribution from IRAS can be
Speaker 3: a really nice strategy as well, where you are giving
Speaker 3: a portion of your IRA once you pass age seventy
Speaker 3: and a half to charity. And we've seen a little
Speaker 3: inflation adjustment in the amount that you can give, but
Speaker 3: it's now over one hundred thousand dollars per year. It's
Speaker 3: a way to reduce the tax burden associated.
Speaker 4: With that I RaSE.
Speaker 3: So that's another strategy to consider. I just wish it
Speaker 3: were available to people of all ages where you could
Speaker 3: potentially lighten up your I RAY a little bit and
Speaker 3: get a tax break and do some charitable giving.
Speaker 2: So we're talking about spending in retirement, but we have
Speaker 2: yet to talk about drawing down portfolios. Bill Sharp, Nobel
Speaker 2: laureate and a key person when it comes to both
Speaker 2: modern portfolio theory and understanding asset allocation, has called this
Speaker 2: the thornious problem in all of finance. Why is figuring
Speaker 2: out how much to draw down your portfolios, whether just
Speaker 2: to live on it or for special spending. Why is
Speaker 2: that such a challenging set of numbers?
Speaker 3: The key issue is that you're dealing with a bunch
Speaker 3: of wild cards. So do you have an uncert in
Speaker 3: time horizon. You don't know how long you'll live, and
Speaker 3: you may have a little bit of a window into
Speaker 3: that as you age, but most of us do not
Speaker 3: have that crystal ball. And then we don't know how
Speaker 3: the markets will perform over our retirement time horizon. And
Speaker 3: then this recent inflation shock really illustrated the wild card
Speaker 3: that inflation is for retirement plans. So you don't know
Speaker 3: how inflation will play out over your horizon. So you
Speaker 3: don't know how much you'll have to elevate your spending
Speaker 3: just to kind of keep your head above water. So
Speaker 3: all of those things are super tricky to get to
Speaker 3: get your arms around. And the key conclusion for a
Speaker 3: lot of people is like, well, I'd rather be safe
Speaker 3: than sorry. I'd rather be a little bit conservative if
Speaker 3: it means a very high likelihood that.
Speaker 4: I won't run out.
Speaker 3: But I do think that kind of one and done
Speaker 3: withdrawal rate. The four percent style guideline is, you know,
Speaker 3: maybe a good proxy if you're fifty in trying to
Speaker 3: figure out if you have enough. But it's not a
Speaker 3: retirement spending plan because people don't spend that way. They
Speaker 3: don't just spend the same amount in a straight line
Speaker 3: adjusted for inflation throughout retirement.
Speaker 2: It's lumpier, so you have a sequence of return problem
Speaker 2: on the asset side, and then you have a front
Speaker 2: loaded spend on the consumption side. That sounds like that
Speaker 2: could be potentially challenging with just a straight up four.
Speaker 3: Percent, definitely, and then long term care, which we talked
Speaker 3: about earlier, that's another wild card in the mix.
Speaker 2: So how often should retirees be reviewing their holdings? How
Speaker 2: often should they be making changes to their budgets? Is
Speaker 2: this a set and forget or do you need to
Speaker 2: regularly be updating this.
Speaker 3: I like the idea of doing it once a year
Speaker 3: as kind of a holistic strategy where you're checking up
Speaker 3: on your withdrawal rate. You're looking at what your portfolio
Speaker 3: could support in the year ahead, and you're doing a
Speaker 3: little bit of portfolio maintenance. So I'm a big believer
Speaker 3: in the bucket approach to retirement income. If you've spent
Speaker 3: from that cash bucket in the previous year, you're also
Speaker 3: looking at your portfolio and deciding, well, where is the
Speaker 3: same place for me to pull from if I need
Speaker 3: to top up that cash bucket to provide me with
Speaker 3: spending money in the year ahead. And you're also doing
Speaker 3: a little bit of tax planning as well, so if
Speaker 3: you're subject to required minimum distributions, for example, you're figuring
Speaker 3: out where to where to go for them. So I
Speaker 3: think a good, one stop, holistic portfolio review is fine
Speaker 3: for most retirees.
Speaker 2: And our final question, you talked about the difference between
Speaker 2: retirement spending and legacy planning. Explain to listeners what that
Speaker 2: difference actually is.
Speaker 3: So I'm not sure how to answer that question, Barry, And.
Speaker 2: It came from your article about your parents helping you
Speaker 2: with the down payment.
Speaker 4: Okay, okay, could you ask me again?
Speaker 2: Sure? So, in the article you wrote about spending while
Speaker 2: you're still alive, talking about how your folks help you
Speaker 2: and your husband with the down payment for your first
Speaker 2: house and how much that was a significant change to you.
Speaker 2: Guys personally explain the difference between simple retirement spending and
Speaker 2: legacy planning.
Speaker 3: The term spending I think is super loaded. When we
Speaker 3: tell people they should be able to spend X in retirement,
Speaker 3: I think they automatically jump to It means we're telling
Speaker 3: them to buy cars every year and if they don't
Speaker 3: need a new one, or go out to dinner every night,
Speaker 3: even if that's not really something they want to do.
Speaker 3: And so I think this term spending is kind of loaded,
Speaker 3: and maybe we're a little bit judgy about it, but
Speaker 3: I would urge people to think broadly about retirement spending,
Speaker 3: and you use their retirement spending to do some legacy planning.
Speaker 3: So you know, the example of our hometown payment is
Speaker 3: one way that I think my parents pursued legacy. They
Speaker 3: you know, certainly made an impact on our lives.
Speaker 4: They kept us nice and.
Speaker 3: Close to them so that we were able to help
Speaker 3: them later in life because we lived nice and close by.
Speaker 3: So I would urge people to think bigger about retirement spending,
Speaker 3: that it should encompass some of these legacy goals, and
Speaker 3: you should give yourself permission to give to your loved
Speaker 3: ones during their lifetimes and during your lifetime.
Speaker 2: So to wrap up, everybody needs to plan for retirement,
Speaker 2: but we also need to think about our spending. The
Speaker 2: odds are that we're going to spend more in the
Speaker 2: early parts of our retirement when we're still younger and
Speaker 2: more mobile than the latter part of our retirement. And
Speaker 2: we really need to think about the prior standard of
Speaker 2: waiting till you're deceased for the monies to find its
Speaker 2: way to the rest of your family. Assuming you have
Speaker 2: enough money to live on and that you're not going
Speaker 2: to outlive your cash, don't be afraid to spend a
Speaker 2: little money. Don't be afraid to donate a little money,
Speaker 2: whether it's family members or charity, while you're still alive
Speaker 2: and while you could see the benefits of your generosity
Speaker 2: with your own eyes. I'm barry redults, you're listening to
Speaker 2: Bloombergs at the money in material