The 6 Retirement Spending Questions Every Retiree Needs Answered

Speaker 1: (00:00)
How much can you spend when you retire? That is the million dollar question. And of course, the answer most people have is as much as possible, but if you spend too much and you run out early, that's also not good. So today we're gonna cover six retirement spending questions that every retiree needs to be able to answer. Stay tuned.

Speaker 2: (00:28)
Everyone,

Speaker 1: (00:29)
I'm Joe Allaria. This is episode 44 of the Retirement Power Hour podcast. We have talked on a previous episode about how to turn your retirement savings into retirement income. And today we're talking specifically about your retirement expenses. So there's some overlap here and things that do relate to one another, but today we're, we're focusing on the expense side of the equation. This continues to be one of the most important factors that any retiree can, can understand about their own plan. So we need to know before we can even develop a retirement income plan, we need to have a very clear understanding of your planned expenses and maybe some of those unplanned expenses as well. But first, before we jump into these six questions, go to retirementpowerhourpodcast.com. If you have any questions or you wanna talk directly, click work with me and you can set up a phone call with me or a member of my team and we can help you get your questions answered.

Speaker 1: (01:31)
But also, you can leave us a review if you found these episodes to be helpful. If you, uh, would do so, we greatly appreciate that. We've got reviews that you can leave on Google, on Spotify, on Apple if you listen to our podcast. So if you would do that for us, we would be greatly appreciative of that. So let's jump into the first question. How much can you safely withdraw from your portfolio each year in retirement? The answer, again, it's going to depend, but safe to say it's probably a range, somewhere from 3.5% to 5% a year. But how old are you? A 65-year-old with 30 years left of retirement? Uh, that answer's gonna be a lot different than a 72-year-old who's got most of their expenses covered with pension income. So there really is no universal answer. And as we talked in our last episode, you're also gonna have different phases of retirement, some where you might be withdrawing a high percentage, some where you might be withdrawing a low percentage.

Speaker 1: (02:40)
And so that also is a factor. One thing I wanted to highlight too, if you think your withdrawal rate needs to be 4%, but you're withdrawing all of your money from IRAs, for example, you, your net number may be 4%, but the money that you're withholding for taxes is still coming out of your portfolio. So that's gonna bump up your overall, your gross withdrawal percentage as well. So if you're in that three and a half to 5%, it, it could be safe, especially the older you are, if you're in that range, you're more likely to be safe. And that kind of poses the question and leads us to our second question. Is the old 4% withdrawal rule still applicable or still useful? Really, the answer, just as a benchmark, as a place to start the conversation, it is not a substitute for your retirement income plan or your retirement spending plan.

Speaker 1: (03:36)
In other words, I would not say let's just take 4% from the portfolio and use that and do that every year. Um, that is not often gonna lead to the best outcomes. You've got people out there with wildly different objectives and maybe, maybe you don't need to take out 4%. Maybe you need to take out higher than 4% for now until future income sources kick in like a pension or like social security. So we've counseled some clients who may be taking out seven, eight, 9% for a couple of years until their pension kicks in or until their social security benefits kick in. So should you panic if you're above that? Not necessarily. Again, retirement comes in with several phases and it, it could come with several phases. If you retire, for example, before 65, uh, you're, you're not on Medicare yet. So you've got some income considerations, some, some health insurance considerations that are gonna change when you turn 65.

Speaker 1: (04:40)
You might not start drawing social security right away. So you've got some considerations that are gonna change when you start taking social security. We've got clients, several clients where a pension may kick in, but it may not kick in until 65. So your situation's gonna change there. RMDs, required minimum distributions that kick in at either 73 or 75, that's going to change your situation. So all these different changes happen in different phases. A 4% dr - uh, withdrawal rule, again, useful as a benchmark, not a replacement for an income plan or a strategy for your expenses. Let's move on to number three. What is the best way to account for one-off expenses in retirement? So when you're thinking about your retirement expenses, one mistake would be you're only thinking about, number one, your fixed bills. Sometimes we ask people, what are your expenses? And they just give us their fixed bills.

Speaker 1: (05:38)
Well, you do spend money on other things than just maybe a mortgage payment or a gas bill or your electric bill. So it's, it's not just your bills, number one, you've got fixed expenses, you've got variable expenses, you know, your grocery bill, your restaurants, your gas bill. It, it could be variable, uh, when you go out and get gas for your vehicle. So you need your fixed and your variable. But what I'm talking about are the one-off expenses like maybe purchasing a new car, which doesn't take place every year. A lot of people like to pay cash for those, but it does take place every few years. And we talk about vehicle purchases as almost a perpetual liability because you, you could finance that, uh, and you could pay it off and drive it paid off for a while, but eventually you're gonna need to buy another one.

Speaker 1: (06:29)
So it's good to build in an allowance for either a car payment or to schedule larger cash purchase amounts in your retirement plan. We can't, we should not pretend like they're just not gonna be there just because you don't have a car payment today. So how do you plan for it? You build those in as best you can. That's a pretty predictable and reliable one for, for folks that live in our area. You know, everyone needs a vehicle where we live. We're not living in the, the middle of a, of a sub - uh, of an urban city where you don't need a vehicle. So that's something to think about. What about home repairs? You know, you need a new HVAC system, you need a new roof coming up at some point. Gonna replace the carpet in the living room. You're gonna get new kitchen appliances.

Speaker 1: (07:18)
These are things, how do you prepare for them? You build them into your plan. You first identify, can we do this? Because as you probably know, things like a new roof may be a necessity or an HVAC system may be a necessity, but you weigh those in the balance. You, you, you find out what do I need to do? If it's going to, to happen, if I need it to happen, then you build it in for sure. And the other things, you, you put a what if scenario on your plan and you say, "Well, what if we renovated our bathrooms? What if we renovated our kitchen and got new kitchen cabinets? The old one wor - the old ones work fine, but we'd like new ones." Then you figure out, is that safe to take money out of the portfolio to cover those things? But the key is you have to include them in your plan.

Speaker 1: (08:08)
And this is where a lot of basic retirement calculators will fail because they'll say, "What are your expenses?" And it just assumes that those expenses will be static. So build those one-off expenses, that's how you plan for them. And that kind of leads to our next question though. Question four, should spending change year to year? Yes, it should. As, number one, as you enter different phases, maybe as you pick up different income streams or as you lose different income streams. Maybe you are working part-time in retirement for a few years, but as you lose that income, your expenses are going to change. As you pick up social security, that could cause your expenses to change as well. I think here's, here's a, a great question to ask yourself. Am I willing to change my expenses if the market goes down? Do I need to change my expenses in retirement?

Speaker 1: (09:03)
And we like to plan so that you don't ever need to change your expenses in retirement, whether the market is up or whether the market is down. If you're willing to change and spend less in retirement and put off some of those projects if the market's down, that could allow you to possibly retire sooner and retire on less. But if you assume, "Hey, I don't ever wanna spend less. I've got my lifestyle. I wanna live in a bubble as if it doesn't matter what happens in the, in the market or in the world, I'm gonna live the same lifestyle." Uh, if you wanna plan like that, it's gonna take a little bit more insulation and security before you actually make that jump to retirement. So do you need to spend your, uh, do you need to change your expenses? Should your expenses change? Uh, most likely they're going to as you enter different phases of retirement.

Speaker 1: (09:58)
But if you're able to fluctuate your expenses when the market is, is down, that is gonna stretch out every dollar that you have. Question five, how do tax rates affect your safe withdrawal rate? Well, again, I mentioned earlier, if you want a 4% withdrawal rate, but it's coming out of your IRA, then the actual withdrawal rate may be higher. Might be 5%, it might be 6% based on what your marginal tax brackets are actually going to be. But things that you need to think about, again, when, when your RMDs kick in, if you're on Medicare and you're possibly at risk of paying surcharges from IRMA, those are considerations that, that you need to take into account as you plan your spending, because depending on where you're pulling money from, pre-tax accounts immediately are gonna increase your income. So that may be something to weigh as you consider that.

Speaker 1: (10:54)
Also, how much of your social security is going to be taxed? Well, if you're not spending very much, then not much of your social security is likely to be taxed. But if you decide to take a big withdrawal out from your IRA to pay for a project, just be prepared that it may cause your social security benefits to be taxed at a higher rate as well. So when we plan our spending, we should plan around things like our marginal tax rates, uh, around IRMA to make sure that we don't penalize ourselves on things that re - we really can control. A lot of retirement expenses, we decide, we choose what we're gonna spend our money on. And the way that those IRMA surcharges work, again, there's a base amount you pay for Medicare, but if you make over a certain amount of money, now you have to pay more and it's a cliff style system.

Speaker 1: (11:49)
That means $1 over each threshold, well, y- you're in that threshold. Uh, it doesn't matter if you're just $1 over, you're gonna pay, uh, at a higher rate for your Medicare coverage. So planning your expenses around marginal tax rate, tax rates and around IRMA, very important. Question six, what is the single biggest risk in retirement? Well, one of the biggest risks is called sequence of returns risk. And that would basically mean you retire and then the market goes down and you have a bad sequence of returns right after you retire. And that, that could be detrimental to your portfolio, as opposed to you retire and you experience several good years in the market, you're taking money out, your portfolio may even still be growing, and so that helps your portfolio last longer. The order in, in which returns happen is incredibly important. In other words, if you have a, a 30-year retirement period with two different people and the average return is 8% in both scenarios, but the first person, again, had 10 good years at the beginning, the second person had a bad 10-year stretch at the beginning of their retirement, the, the value of their portfolio at the end of their retirement is gonna look vastly different.

Speaker 1: (13:12)
The person who's had a rough start to retirement is gonna be in a worse position. So you gotta plan against that. Um, a lot of our expenses in retirement are just gonna happen. They're living expenses. They're not discretionary. So I know I mentioned earlier having the ability to potentially reduce your expenses if the market's down, but I think a better way to plan against this risk is something we talked about in the last episode, building out a properly structured investment approach that matches your investments with your expected timeframe for withdrawals. It's a bucketing investment approach. It's a bucketing approach to retirement income, meaning if I'm gonna spend money in the next couple years, I'm putting that in an investment that is very safe, very low risk of declining, may not get me as high of a rate of return, but I'm securing my income with putting it in those safer investments.

Speaker 1: (14:14)
And then as time goes, as expected withdrawal, timeframe increases, we can start to use more and more aggressive investments. That to us is how you make an effective retirement income plan. So six questions, zero simple answers. It always depends. If you didn't see our last episode talking more about retirement income, uh, go back and watch that as well because there's a lot of good questions in that one too. And we have articles, full articles on both of these topics. First, how to turn your retirement savings into retirement income. And this one, how much does retirement cost? So you can view both of those articles at our firm's website, and that's carsonallaria.com, carsonallaria.com. Click on our resources tab, click the blog, you'll see all of our articles there. Um, again, you can go to retirementpowerhourpodcast.com to leave us a review or to ask a question or to schedule a call.

Speaker 1: (15:13)
We're here to help you. To answer your questions if we can, you'll speak with me or a member of our team. So go to retirementpowerhourpodcast.com. If you're still watching or listening, I thank you for tuning in and encourage you, stay tuned for more episodes of the Retirement Power Hour, where we help listeners invest wiser and retire better. Take care.