WEBVTT - At The Money: The Right Way to Spend Your Money in Retirement

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Speak to any financial advisor and they'll tell you one

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<v Speaker 2>of the biggest challenges they have professionally is getting clients

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<v Speaker 2>to actually spend their money. After decades of working and

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<v Speaker 2>saving and investing, making the turn to spending money can

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<v Speaker 2>be a challenge. I'm Barry Ritolts, and on today's edition

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<v Speaker 2>of At the Money, we're going to discuss spending your

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<v Speaker 2>mollah in retirement. To help us unpack all of this

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<v Speaker 2>and what it means to your retirement, let's bring in

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<v Speaker 2>Christine Benz. She is the director of Personal Finance and

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<v Speaker 2>retirement Planning at morning Star. She's published numerous books on money,

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<v Speaker 2>investing and retirement, most recently How to Retire Twenty Lessons

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<v Speaker 2>for a Happy, successful, and Wealthy Retirement. So let's start

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<v Speaker 2>with the basic problem. Getting those type A personalities who

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<v Speaker 2>are used to working and saving and working and investing

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<v Speaker 2>to kind of pivot to working and spending is a

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<v Speaker 2>big challenge. How big of an issue is this amongst

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<v Speaker 2>people who are looking at retirement.

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<v Speaker 3>It's a very big issue, and it's kind of a

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<v Speaker 3>difficult topic to talk about because we have a lot

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<v Speaker 3>of people in our society who are quite undersaved relative

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<v Speaker 3>to what they will need for retirement, they'll be exclusively

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<v Speaker 3>dependent on social Security. But there is also a segment

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<v Speaker 3>of our population who struggles with spending appropriately. I can't

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<v Speaker 3>tell you, Barry, how many times I've been out speaking

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<v Speaker 3>to a group of older adults and I'll have someone

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<v Speaker 3>come up at the end of one of my sessions.

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<v Speaker 4>Clearly his or her eighties.

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<v Speaker 3>Usually his based on the composition of the audiences I

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<v Speaker 3>usually speak with, and he'll proudly say, I only spend

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<v Speaker 3>two percent of my portfolio per year, whatever the value is,

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<v Speaker 3>that's what I spend. And I kind of think to myself, well, gosh,

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<v Speaker 3>I hope that that delivers you a good quality of life.

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<v Speaker 3>And I also think to myself, you're probably pretty significantly

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<v Speaker 3>short changing yourself if you're just spending at that level.

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<v Speaker 3>And as you said, Barry, I hear this from financial

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<v Speaker 3>advisors as well, that they struggle getting their clients to

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<v Speaker 3>spend appropriately.

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<v Speaker 2>I heard a funny line from a pair of older

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<v Speaker 2>clients who were getting on a plane and they were

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<v Speaker 2>sitting in first class and they bump into friends they

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<v Speaker 2>know who are sitting in coach, and the conversation was

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<v Speaker 2>they just could imagine each other's conversation. Look at them

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<v Speaker 2>in the front of the plane spending their kids' inheritance,

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<v Speaker 2>and then the one sitting in the front of the

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<v Speaker 2>plane saying, can you imagine their flying coach so their

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<v Speaker 2>kids can fly first first class. It's kind of funny,

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<v Speaker 2>But ultimately, isn't this a psychological struggle about not just

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<v Speaker 2>outliving your own money. Assuming we're talking about people who

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<v Speaker 2>aren't going to outlive their own money, there's still this

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<v Speaker 2>enormous hesitancy to spend their kids inheritance or to spend

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<v Speaker 2>money when they've spent their whole lives. As Savers tell us.

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<v Speaker 3>About that exactly, it's a sense of identity. I think

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<v Speaker 3>that one builds as a saver and an investor that

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<v Speaker 3>you are someone who defers gratification. You set money aside

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<v Speaker 3>each month, and the further you go along in that journey,

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<v Speaker 3>probably the more successful you are, you get to see

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<v Speaker 3>the incredible power of compounding. I think there is a

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<v Speaker 3>common tendency to kind of anchor on the portfolio Leo's

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<v Speaker 3>high water mark, to think, well, if it's here, I

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<v Speaker 3>never want to see it go lower. It just does

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<v Speaker 3>not feel good to see the balance go down after

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<v Speaker 3>a lifetime of seeing it generally escalate. So there's a

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<v Speaker 3>lot going on psychologically, and kind of an elephant in

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<v Speaker 3>the room in this respect is long term care. That

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<v Speaker 3>people who have not purchased long term care insurance and

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<v Speaker 3>may have really good reasons to not have done so,

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<v Speaker 3>still have this risk of like, oh, may I have

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<v Speaker 3>this balloon payment at the end of my life where

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<v Speaker 3>you know, I could get stuck with years and years

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<v Speaker 3>of expensive care. So I think that that is a

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<v Speaker 3>real risk factor that is in the mix as well.

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<v Speaker 2>Really really interesting. So since we're talking about long term care,

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<v Speaker 2>let's talk about generally putting together a personalized plan, thinking

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<v Speaker 2>about needs and goals, lifestyle considerations. What should someone who

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<v Speaker 2>wants to spend more of their money do in order

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<v Speaker 2>to feel comfortable that they can afford to spend the

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<v Speaker 2>little cash?

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<v Speaker 3>Well, I would say, either get a financial advisor to

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<v Speaker 3>help you with this, where they're effectively disbursing a portion

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<v Speaker 3>of your portfolio to you per year if you're doing

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<v Speaker 3>it on your own, get familiar with the research on

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<v Speaker 3>safe spending rates. A lot of the research that's been

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<v Speaker 3>done by our team and Others points to the value

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<v Speaker 3>of being flexible with your portfolio withdrawals, where you are

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<v Speaker 3>taking more when your balance is up when the markets

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<v Speaker 3>are up, and you're taking a little bit less when

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<v Speaker 3>things are down. I think if people understand the data

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<v Speaker 3>that we have on retirement spending, one thing that we

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<v Speaker 3>know is that people tend to spend less as they age.

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<v Speaker 3>So your early years of retirement should be the higher

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<v Speaker 3>spending years of your retirement because that's usually when people's

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<v Speaker 3>health is good. They may have pent up demand to

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<v Speaker 3>do travel, they may be launching adult children, a lot

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<v Speaker 3>of things going on at that life stage.

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<v Speaker 4>You should give yourself permission to spend.

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<v Speaker 3>A little bit more early in retirement with the knowledge

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<v Speaker 3>that even when we look at spending trajectories among very

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<v Speaker 3>wealthy households, people spend less as they age. So if

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<v Speaker 3>you're okay with that trade off, with the idea that

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<v Speaker 3>you probably will spend less, you should give yourself a

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<v Speaker 3>little bit more license to spend earlier on.

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<v Speaker 2>So let's break those spending desires down. You mentioned travel,

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<v Speaker 2>like it's easy to travel in your sixties and seventies

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<v Speaker 2>than it is in your eighties and nineties. Hobbies legacy

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<v Speaker 2>philanthropy or charitable goals, to say nothing of future healthcare needs.

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<v Speaker 2>How should people organize their thoughts and planning for future spending.

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<v Speaker 3>Yeah, I think it's helpful to get very granular about

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<v Speaker 3>the budgeting. And I don't mean you know that you're

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<v Speaker 3>nickel and diming yourself and looking at every line item.

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<v Speaker 3>But if you have, say a big family trip planned

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<v Speaker 3>in year two of your retirement, spend some time figuring

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<v Speaker 3>out what the implications will be for your plan for

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<v Speaker 3>your spending in that year. Know that those big outlays

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<v Speaker 3>won't occur every year, but actually spend some time mapping

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<v Speaker 3>them out.

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<v Speaker 4>And the nice.

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<v Speaker 3>Thing about that is that, in addition to it helping

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<v Speaker 3>your spending plan, it will also help you get these

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<v Speaker 3>plans off the ground, rather than having them as some

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<v Speaker 3>you know, sort of vague notion of things that you

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<v Speaker 3>want to do. You mentioned lifetime giving, barry to family

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<v Speaker 3>members and charity. I have come to be a huge

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<v Speaker 3>evangelist for this because when we look at the data

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<v Speaker 3>on when people inherit money from their parents, they're usually

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<v Speaker 3>in their fifties or in their sixties. They're findingential fortunes

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<v Speaker 3>are pretty well set by that life stage, Whereas if

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<v Speaker 3>you have young people in your life, whether children, grandchildren, nieces, nephews,

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<v Speaker 3>you can make a big impact for them in the twenties,

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<v Speaker 3>thirties forties with hometown payments or paying off student loans,

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<v Speaker 3>and these don't need to be big ticket gifts. Smaller

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<v Speaker 3>gifts can make a big impact. I often talk about

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<v Speaker 3>how my mom and dad gave my husband and me

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<v Speaker 3>a little bit of padding for our home down payment

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<v Speaker 3>on our first home, and that helped us get into

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<v Speaker 3>a home that we were able to stay in for

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<v Speaker 3>twelve years. We lived exactly in the community where we

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<v Speaker 3>wanted to live. So having that discussion with your loved

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<v Speaker 3>ones about the gifts that might help them, I think,

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<v Speaker 3>is something that can add a lot of richness to

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<v Speaker 3>someone's retirement.

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<v Speaker 2>I recall reading your piece what was it in the

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<v Speaker 2>fall last year or maybe around the holidays? Intervevos transfers

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<v Speaker 2>is the technical time while you're alive. This seems to

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<v Speaker 2>be increasingly modern development. Like I think back twenty five

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<v Speaker 2>thirty five years, you didn't hear that much about it,

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<v Speaker 2>at least outside of the top one or five percent.

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<v Speaker 2>Now it's fairly common for the X or boomer generation

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<v Speaker 2>to help with a down payment or college. As you mentioned,

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<v Speaker 2>tell us about what you're seeing out in the world.

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<v Speaker 2>How significant has this become? Is this something around the

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<v Speaker 2>fringes or are we seeing a lot more intervivos transfers

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<v Speaker 2>today than say, twenty thirty forty years ago.

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<v Speaker 3>I don't have any data on it, Barry, but my

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<v Speaker 3>sense is that the movement to toward lifetime giving is

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<v Speaker 3>picking up steam, and not just for very wealthy people.

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<v Speaker 3>I think sometimes people are put off by the term

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<v Speaker 3>lifetime giving. It sounds very highbro, but it doesn't have

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<v Speaker 3>to be. It can be assistance with some of those

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<v Speaker 3>smaller life achievements that young people might might want to

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<v Speaker 3>tick off their lists. So I would urge planners and

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<v Speaker 3>individuals pursuing their own retirement plans to think about building

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<v Speaker 3>in some of those lifetime giving aspirations. And also, you know,

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<v Speaker 3>there are really nice tax planning mechanisms that people can

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<v Speaker 3>use to help them achieve achieve those things as well.

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<v Speaker 3>The donor advised fund for charitable gifts especially.

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<v Speaker 2>And why shouldn't you see family members, friends, whoever enjoy

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<v Speaker 2>the benefits of your largest while you're still around it

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<v Speaker 2>shouldn't be just something you think about when you're at

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<v Speaker 2>you'r a state attorney and you're signing a document and

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<v Speaker 2>that's the last you see of it. Why not get

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<v Speaker 2>to enjoy your kids or nephews or whoever in a

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<v Speaker 2>new house that you help them get there exactly.

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<v Speaker 3>That is the huge side benefit of contemplating lifetime giving.

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<v Speaker 2>So let's talk about a little more formal type of giving.

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<v Speaker 2>You mentioned donor advised funds. Philanthropy when it comes to

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<v Speaker 2>both financial and estate planning. I'm going to say that again,

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<v Speaker 2>philanthropy is a big part of both retirement and estate planning.

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<v Speaker 2>Talk a little bit about the idea behind how families

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<v Speaker 2>should be thinking about managing philanthropy or donating to causes

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<v Speaker 2>that are near and dear to their heart.

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<v Speaker 3>Yeah, get some advice on the tax aspect of this.

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<v Speaker 3>The donor advised fund is a really nice mechanism for

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<v Speaker 3>people of varying means, and it's especially appropriate for people

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<v Speaker 3>who have concentrated positions in their portfolios. Off an employer

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<v Speaker 3>stock where you can kind of take a risk out

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<v Speaker 3>of the portfolio and donate the say employer stock to

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<v Speaker 3>the donor advised fund and get a tax deduction on

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<v Speaker 3>that contribution, and you can also remove the capital gains

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<v Speaker 3>tax associated with that big gain in the position at

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<v Speaker 3>the same time. And then from there on, once you've

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<v Speaker 3>established the donor advice funds, you can make those charitable

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<v Speaker 3>gifts on an ongoing basis. So that's one strategy that

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<v Speaker 3>I would say would be kind of a first line

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<v Speaker 3>to consider for people of all levels of wealth. And

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<v Speaker 3>then for people who are moving up and getting into retirement,

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<v Speaker 3>using the charitable Qualified Charitable distribution from IRAS can be

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<v Speaker 3>a really nice strategy as well, where you are giving

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<v Speaker 3>a portion of your IRA once you pass age seventy

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<v Speaker 3>and a half to charity. And we've seen a little

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<v Speaker 3>inflation adjustment in the amount that you can give, but

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<v Speaker 3>it's now over one hundred thousand dollars per year. It's

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<v Speaker 3>a way to reduce the tax burden associated.

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<v Speaker 4>With that I RaSE.

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<v Speaker 3>So that's another strategy to consider. I just wish it

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<v Speaker 3>were available to people of all ages where you could

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<v Speaker 3>potentially lighten up your I RAY a little bit and

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<v Speaker 3>get a tax break and do some charitable giving.

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<v Speaker 2>So we're talking about spending in retirement, but we have

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<v Speaker 2>yet to talk about drawing down portfolios. Bill Sharp, Nobel

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<v Speaker 2>laureate and a key person when it comes to both

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<v Speaker 2>modern portfolio theory and understanding asset allocation, has called this

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<v Speaker 2>the thornious problem in all of finance. Why is figuring

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<v Speaker 2>out how much to draw down your portfolios, whether just

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<v Speaker 2>to live on it or for special spending. Why is

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<v Speaker 2>that such a challenging set of numbers?

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<v Speaker 3>The key issue is that you're dealing with a bunch

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<v Speaker 3>of wild cards. So do you have an uncert in

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<v Speaker 3>time horizon. You don't know how long you'll live, and

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<v Speaker 3>you may have a little bit of a window into

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<v Speaker 3>that as you age, but most of us do not

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<v Speaker 3>have that crystal ball. And then we don't know how

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<v Speaker 3>the markets will perform over our retirement time horizon. And

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<v Speaker 3>then this recent inflation shock really illustrated the wild card

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<v Speaker 3>that inflation is for retirement plans. So you don't know

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<v Speaker 3>how inflation will play out over your horizon. So you

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<v Speaker 3>don't know how much you'll have to elevate your spending

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<v Speaker 3>just to kind of keep your head above water. So

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<v Speaker 3>all of those things are super tricky to get to

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<v Speaker 3>get your arms around. And the key conclusion for a

0:14:39.000 --> 0:14:41.280
<v Speaker 3>lot of people is like, well, I'd rather be safe

0:14:41.280 --> 0:14:45.000
<v Speaker 3>than sorry. I'd rather be a little bit conservative if

0:14:45.040 --> 0:14:47.320
<v Speaker 3>it means a very high likelihood that.

0:14:47.320 --> 0:14:48.280
<v Speaker 4>I won't run out.

0:14:49.480 --> 0:14:51.720
<v Speaker 3>But I do think that kind of one and done

0:14:51.800 --> 0:14:56.240
<v Speaker 3>withdrawal rate. The four percent style guideline is, you know,

0:14:56.320 --> 0:14:58.760
<v Speaker 3>maybe a good proxy if you're fifty in trying to

0:14:58.760 --> 0:15:01.080
<v Speaker 3>figure out if you have enough. But it's not a

0:15:01.120 --> 0:15:04.480
<v Speaker 3>retirement spending plan because people don't spend that way. They

0:15:04.480 --> 0:15:07.480
<v Speaker 3>don't just spend the same amount in a straight line

0:15:07.600 --> 0:15:09.880
<v Speaker 3>adjusted for inflation throughout retirement.

0:15:09.960 --> 0:15:13.400
<v Speaker 2>It's lumpier, so you have a sequence of return problem

0:15:13.560 --> 0:15:16.960
<v Speaker 2>on the asset side, and then you have a front

0:15:17.000 --> 0:15:21.560
<v Speaker 2>loaded spend on the consumption side. That sounds like that

0:15:21.600 --> 0:15:25.160
<v Speaker 2>could be potentially challenging with just a straight up four.

0:15:25.000 --> 0:15:28.600
<v Speaker 3>Percent, definitely, and then long term care, which we talked

0:15:28.600 --> 0:15:31.240
<v Speaker 3>about earlier, that's another wild card in the mix.

0:15:32.160 --> 0:15:37.080
<v Speaker 2>So how often should retirees be reviewing their holdings? How

0:15:37.080 --> 0:15:40.800
<v Speaker 2>often should they be making changes to their budgets? Is

0:15:40.880 --> 0:15:43.120
<v Speaker 2>this a set and forget or do you need to

0:15:43.320 --> 0:15:45.200
<v Speaker 2>regularly be updating this.

0:15:46.120 --> 0:15:48.320
<v Speaker 3>I like the idea of doing it once a year

0:15:48.400 --> 0:15:51.840
<v Speaker 3>as kind of a holistic strategy where you're checking up

0:15:51.840 --> 0:15:54.720
<v Speaker 3>on your withdrawal rate. You're looking at what your portfolio

0:15:54.720 --> 0:15:58.160
<v Speaker 3>could support in the year ahead, and you're doing a

0:15:58.160 --> 0:16:01.240
<v Speaker 3>little bit of portfolio maintenance. So I'm a big believer

0:16:01.400 --> 0:16:04.800
<v Speaker 3>in the bucket approach to retirement income. If you've spent

0:16:04.920 --> 0:16:08.280
<v Speaker 3>from that cash bucket in the previous year, you're also

0:16:08.400 --> 0:16:12.440
<v Speaker 3>looking at your portfolio and deciding, well, where is the

0:16:12.480 --> 0:16:15.560
<v Speaker 3>same place for me to pull from if I need

0:16:15.560 --> 0:16:18.120
<v Speaker 3>to top up that cash bucket to provide me with

0:16:18.200 --> 0:16:20.680
<v Speaker 3>spending money in the year ahead. And you're also doing

0:16:20.720 --> 0:16:23.520
<v Speaker 3>a little bit of tax planning as well, so if

0:16:23.520 --> 0:16:27.080
<v Speaker 3>you're subject to required minimum distributions, for example, you're figuring

0:16:27.120 --> 0:16:30.160
<v Speaker 3>out where to where to go for them. So I

0:16:30.160 --> 0:16:36.200
<v Speaker 3>think a good, one stop, holistic portfolio review is fine

0:16:36.240 --> 0:16:37.360
<v Speaker 3>for most retirees.

0:16:38.000 --> 0:16:42.600
<v Speaker 2>And our final question, you talked about the difference between

0:16:42.680 --> 0:16:48.800
<v Speaker 2>retirement spending and legacy planning. Explain to listeners what that

0:16:49.160 --> 0:16:50.240
<v Speaker 2>difference actually is.

0:16:51.320 --> 0:16:55.960
<v Speaker 3>So I'm not sure how to answer that question, Barry, And.

0:16:56.160 --> 0:17:00.080
<v Speaker 2>It came from your article about your parents helping you

0:17:00.200 --> 0:17:01.080
<v Speaker 2>with the down payment.

0:17:01.600 --> 0:17:03.880
<v Speaker 4>Okay, okay, could you ask me again?

0:17:04.119 --> 0:17:09.480
<v Speaker 2>Sure? So, in the article you wrote about spending while

0:17:09.480 --> 0:17:13.320
<v Speaker 2>you're still alive, talking about how your folks help you

0:17:13.359 --> 0:17:16.320
<v Speaker 2>and your husband with the down payment for your first

0:17:16.320 --> 0:17:22.440
<v Speaker 2>house and how much that was a significant change to you.

0:17:22.480 --> 0:17:28.680
<v Speaker 2>Guys personally explain the difference between simple retirement spending and

0:17:29.119 --> 0:17:30.080
<v Speaker 2>legacy planning.

0:17:31.359 --> 0:17:34.240
<v Speaker 3>The term spending I think is super loaded. When we

0:17:34.359 --> 0:17:38.119
<v Speaker 3>tell people they should be able to spend X in retirement,

0:17:38.200 --> 0:17:41.560
<v Speaker 3>I think they automatically jump to It means we're telling

0:17:41.640 --> 0:17:44.000
<v Speaker 3>them to buy cars every year and if they don't

0:17:44.040 --> 0:17:46.240
<v Speaker 3>need a new one, or go out to dinner every night,

0:17:46.359 --> 0:17:48.439
<v Speaker 3>even if that's not really something they want to do.

0:17:48.920 --> 0:17:51.920
<v Speaker 3>And so I think this term spending is kind of loaded,

0:17:51.960 --> 0:17:54.560
<v Speaker 3>and maybe we're a little bit judgy about it, but

0:17:54.680 --> 0:17:58.919
<v Speaker 3>I would urge people to think broadly about retirement spending,

0:17:59.440 --> 0:18:04.360
<v Speaker 3>and you use their retirement spending to do some legacy planning.

0:18:04.520 --> 0:18:08.240
<v Speaker 3>So you know, the example of our hometown payment is

0:18:08.320 --> 0:18:12.120
<v Speaker 3>one way that I think my parents pursued legacy. They

0:18:13.280 --> 0:18:15.480
<v Speaker 3>you know, certainly made an impact on our lives.

0:18:15.560 --> 0:18:16.840
<v Speaker 4>They kept us nice and.

0:18:16.760 --> 0:18:19.480
<v Speaker 3>Close to them so that we were able to help

0:18:19.560 --> 0:18:22.480
<v Speaker 3>them later in life because we lived nice and close by.

0:18:23.000 --> 0:18:27.360
<v Speaker 3>So I would urge people to think bigger about retirement spending,

0:18:27.440 --> 0:18:30.679
<v Speaker 3>that it should encompass some of these legacy goals, and

0:18:30.680 --> 0:18:35.240
<v Speaker 3>you should give yourself permission to give to your loved

0:18:35.240 --> 0:18:37.919
<v Speaker 3>ones during their lifetimes and during your lifetime.

0:18:38.880 --> 0:18:43.520
<v Speaker 2>So to wrap up, everybody needs to plan for retirement,

0:18:43.720 --> 0:18:47.200
<v Speaker 2>but we also need to think about our spending. The

0:18:47.200 --> 0:18:49.439
<v Speaker 2>odds are that we're going to spend more in the

0:18:49.520 --> 0:18:53.399
<v Speaker 2>early parts of our retirement when we're still younger and

0:18:53.520 --> 0:18:56.720
<v Speaker 2>more mobile than the latter part of our retirement. And

0:18:56.760 --> 0:19:01.960
<v Speaker 2>we really need to think about the prior standard of

0:19:02.040 --> 0:19:04.840
<v Speaker 2>waiting till you're deceased for the monies to find its

0:19:04.880 --> 0:19:07.879
<v Speaker 2>way to the rest of your family. Assuming you have

0:19:08.000 --> 0:19:10.080
<v Speaker 2>enough money to live on and that you're not going

0:19:10.160 --> 0:19:13.199
<v Speaker 2>to outlive your cash, don't be afraid to spend a

0:19:13.240 --> 0:19:16.680
<v Speaker 2>little money. Don't be afraid to donate a little money,

0:19:16.720 --> 0:19:20.800
<v Speaker 2>whether it's family members or charity, while you're still alive

0:19:20.880 --> 0:19:24.359
<v Speaker 2>and while you could see the benefits of your generosity

0:19:25.200 --> 0:19:29.040
<v Speaker 2>with your own eyes. I'm barry redults, you're listening to

0:19:29.160 --> 0:19:32.040
<v Speaker 2>Bloombergs at the money in material