In this episode of "Friends Talk Financial Planning," hosts John and Bridget dive into an important aspect of retirement planning: understanding and estimating future spending. They discuss how current spending habits can serve as a reliable baseline for retirement expenses, challenging the conventional advice to look at retirement spending as a percentage of pre-retirement income.
John and Bridget explore the concept of the "retirement smile," which describes how spending often increases in the early years of retirement as individuals take advantage of newfound free time and resources, before gradually tapering off in later years. They emphasize the importance of tracking past expenses using credit and bank statements to create a realistic spending plan.
The discussion also includes practical considerations for retirees, such as making housing adjustments earlier rather than later and finding joy in simple pleasures as life progresses. With a focus on planning as a dynamic process rather than a static event, this episode provides valuable insights for anyone looking to navigate the financial aspects of retirement successfully.
Resources:
Alliance of Comprehensive Planners: https://www.acplanners.org
John's firm website: https://www.trinfin.com
Find us on Facebook: www.facebook.com/friendstalkfinancialplanning
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TRANSCRIPT:
John: In planning for retirement, one of the biggest variables is how much a person's going to spend. But how do you figure out what your spending is going to look like in retirement? That's our topic on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John, before we start talking about spending in retirement, let's ask everybody to subscribe. That helps YouTube and other viewers find us. John, let's talk. Someone comes to you and says, how much am I going to spend in retirement? How do I figure this out? I've just realized that that's one of the number one factors that I need to consider. What should I do?
John: Yeah. And I'd like to just pause right there for a second. That is the big factor. Oftentimes we'll get folks who ask things like tell me about how I can save more for retirement or what's the, what's the withdrawal strategy or some of these legitimate important questions that come down the road. But the big one is that I can't tell a person how much they’re going to spend. How much are you spending, Bridget? How much are you going to spend in retirement? That's the variable that makes such a big difference, especially when you extrapolate out over a 30-year retirement.
If it’s $75,000 versus $100,000, that's a big difference over a 30-year period. And so, one of the things that we talk about is figure out what you're spending now. Don't project, necessarily. What did I spend last year? We've talked about it on the show before. Take credit card statements, take bank statements. What literally went out the door? Hard to argue that that's what you spent last year, right? And then I think that we should take and go forward. Let's assume that that's the base for spending going forward, especially as you're close to retirement. If you're 20 years away, it's a little bit harder to predict. There’re some more variables.
If I'm five years away, all right, what I'm spending now is likely what I’m going to spend in the future, which is a different tactic than many people in the financial world take. They say something like, “Well, let's assume that you spend 80% of your current income or something like that.” They do it based on your income. And I go, listen, let's talk about spending, because that's tangible, it's real. We can figure out what you spent last year. And just start with that and say, listen, the baseline is let's assume that you’re going to spend tomorrow what you spent yesterday.
Bridget: Yeah. I think people have their habits established. This comes from Burt Whitehead, who founded ACP, and he really influenced me in this regard, because in the industry a lot of people say, “Take 80% of your current spending or 60% of your current spending and use that as your number.” But I really think that 100% works better, because what I see with people is retirement is not a time to aspire to cut back.
John: Right.
Bridget: It's a time to aspire to expand.
John: Right. Especially in that early part.
Bridget: You want to expand your life, not cut back your life.
John: Right.
Bridget: When we're working with people, that's what we're trying to get them to think about. How can you expand your horizons? So saying how can you expand your horizons and spend less is tough.
John: Right. And yeah, I agree. When you project out, hey, we're going to spend less than we're currently spending, you go, hang on a second, I probably want to spend more than that. And that leads me to one of the things I've been saying for a while. I used to call it an hourglass where expenses kind of go up as you get into retirement because now you finally got time, and you got some dough, and you want to go do things. And then over time it sort of filters down. And to use Burt Whitehead's term, at some point you've been there, done that, got the t-shirt. For various reasons, either I've already done so many things or, physically or mentally, I'm not interested in doing those things anymore—travel and other things like that.
And so, studies have been coming out here in the last five or ten years, that are verifying that anecdotal evidence and the things that we believe from real life. And they call it a retirement smile where it sort of starts in retirement at a high level. I think it kind of goes up as you just said. But then it goes down over time. For viewers, think about people in their 70s and 80s and into their 90s. Typically speaking, spending is not going up for those folks for things like travel and entertainment and those sort of lifestyle things. For many people, it flattens out and goes down in a lot of cases, because they're just not as active in various fashions as they have been.
This might not be the case for everybody, but if you take the average, that's the expected thing. And of course, at the end of life, when we have more health care costs, that smile comes back up. So you might hear as you read or view other things, the retirement smile, the spending smile, and that's what that means. Spending goes down gradually over the course of retirement and then comes back up at the end of life. But listen, I kind of like that bump in the first part, which is where I get a sort of weird hourglass shape to my smile, or maybe it's a Picasso kind of smile with the curve that doesn't go the same direction or something like that.
But it's one of those where, hey, when I'm 62 or 66 or 68 or 70, I want to go out and do things. I've always wanted to go to South Africa on a photo safari or all these sorts of things. Cool. Let's go do that. When I'm 88 or 92, either I've done those things or that doesn't have so much appeal to me. And I encourage folks to think about this. We were just talking with a client about what's it was like for their folks, because both of their parents were in their 90s. How was their spending looking?
And I didn't know the answer. I always want to know what's the truth so I can give good advice. Oh, yeah. Boy, they don't spend nearly what they did 10 years ago. Okay. That's not surprising. But also, that helps to formulate some of the thought process as we think again about, if I'm 58 and trying to retire at 62, how do I plan out the next 30 years of spending? Look at some of the experiences that you have in your life and maybe even talk with your parents, relatives, friends who are a little bit older and ask about what it's been like for them.
Bridget: Yeah. Another thing I want to bring up about being 70 and spending more at the beginning of retirement is that I like to encourage my clients at that age to think about their housing. If you want to make changes in your house, either by moving, it's a lot easier at 70 than 80, or 85. I mean, I just moved last year. I'm not 80, and it was a lot of work. And this is not something that gets easier as you age. Same with dealing with contractors. It's not easier to deal with contractors when you're older than when you're younger. It’s something that I try to encourage people to engage with when they're younger, although I get a lot of resistance.
But I had this one couple who moved when they were 85 and what a lot of work for them, for the kids. And how miserable they were for two years at 85, a time in life when you don't really want to be miserable. So anyway, thinking about that and again spending some money, if you need to spend some money on things like getting the new garage, redoing the kitchen, getting a new bathroom, putting in a couple extra railings. Great. Do it at that age versus putting it off, because it's going to happen, so why not do it now? That's something that I encourage people to spend money on at that age.
John: As we talk about using your current spending as the baseline and this retirement smile thing, that doesn't give a lot of practical advice like. So how do you actually think about that stuff? And I think my take is, listen, if we take our starting point as what are you spending now, I just use that and say, listen, let's assume that's the baseline and maybe factor in some inflation on that. In the early years you're probably spending some more than that, and in the middle years you're probably going to spend some less than that.
That's probably going to go for quite some time. And experience has shown that it's not necessary to figure out how much more you’re going to spend in those early years and how much less in those middle years. It tends to take that average cost from the starting point. We like to talk about financial planning as a process, not an event. It’s a matter of saying here’s the schedule, put it on a shelf, and it happens.
No, there's going to be some more and there's going to be some less. And maybe we go through a 2008, 2009 and market goes down and you spend a little bit less because that's how you lived your life. And it's a moving target, so I don't think we need to stress too much about it, because it averages out over time. And going back, using what you're currently spending is really the most effective way to do that. What's your take on that?
Bridget: I agree. I do have another a couple that I worked with, and when they were working with me, they were both employed, and one person had a high income. They were savers, but they weren't over savers for sure. And I was skeptical because I haven't seen people cut back on their spending that much when they're retired. And I really don't encourage people to do that. But they said, “When we retire, we’re moving to Maine and we’re going to cut down our spending.” I thought, “Okay, we'll use those numbers.” But sure enough, they have. And they're happy. They're really happy.
It reminds me of when you were talking about people when they're 90 and what they like. These two people are not in 90s at this point, but if you can think about where's your happy place, then try to get to your 80s and 90s in your happy place. For instance, with my dad, he had a condo on the beach, and he loved this little performance space next to the beach. And it was maybe half a block away.
But every night he'd go down to that performance space, and there were local people, basically pick-up bands, and they would pass the hat. And then he talked to all the people around. That was his happy place. And in his 90s, that totally hit the spot for him. And the other people loved seeing him there. It's interesting because I often see that people as they get older really do appreciate simple things more than the people who are younger tend to be more distracted.
John: Yeah, it reminds me of Charlie Munger who was famous for a lot of things, but one of his quotes was, “The key to happiness in life is having low expectations.” It’s kind of a funny way to put things, but it rings true. Traveling the world and doing these things is really awesome, but on a day-to-day basis being able to go down to the performance place and see what local musicians come up and finding joy in the simple things is special. There's a lot to be said for that. So I think that's maybe a great place to wrap up.
And sort of circling back, how should you think about retirement spending? How do you plan for that? Take what you're spending now, especially if you're close to retirement and assume that's going to be the baseline going forward. And that has been very effective in getting close to the real number so that people can plan on an ongoing basis for retirement. So with that, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. We're both proud members of the Alliance of Comprehensive Planners, which is a group of family financial planners from all over the country. John and I are both taking clients, but if you're looking for an advisor who kind of thinks like we do in your area, check out acplanners.org.
John: And don't forget, hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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