One of the biggest challenges of retirement is actually spending your money! After decades of working, saving, and investing, pivoting to spending down your accumulated wealth can be surprisingly difficult.<\/p>\n
Full transcript below.<\/p>\n
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About this week\u2019s guest:<\/p>\n
Christine Benz is Director of Personal Finance & Retirement Planning at Morningstar; her new book is \u201cHow to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement<\/a>.\u201d\u00a0She joins Barry Ritholtz to discuss what you need to know about planning for retirement.<\/p>\n For more info, see:<\/p>\n Professional\/Personal website<\/a><\/p>\n LinkedIn<\/a><\/p>\n Twitter<\/a><\/p>\n Book:\u00a0How to Retire: 20 lessons for a happy, successful, and wealthy retirement\u00a0<\/a><\/p>\n ~~~<\/p>\n Find all of the previous\u00a0At the Money\u00a0episodes here<\/a>, and in the MiB feed on\u00a0Apple Podcasts<\/a>,\u00a0YouTube<\/a>,\u00a0Spotify<\/a>, and\u00a0Bloomberg<\/a>. And find the entire musical playlist of all the songs I have used on At the Money on Spotify<\/a><\/p>\n \u00a0<\/p>\n<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n TRANSCRIPT:<\/p>\n Speak to any financial advisor and they\u2019ll tell you one of the biggest challenges they have professionally is getting clients to actually spend their money after decades of working and saving and investing. Making the turn to spending money can be a challenge.<\/p>\n I\u2019m Barry Ritholtz and on today\u2019s edition of At The Money, we\u2019re gonna discuss spending your moolah in retirement.<\/p>\n To help us unpack all of this and what it means to your retirement, let\u2019s bring in Christine Benz. She is the Director of Personal Finance and Retirement Planning at Morningstar. She\u2019s published numerous books on money investing and retirement. Most recently, \u201cHow to Retire: 20 Lessons for a Happy, Successful and Wealthy Retirement.\u201d<\/p>\n So, so let\u2019s start with the basic problem. Getting those type A personalities who are used to working and saving and working and investing to kind of pivot to working and spending is a big challenge. How big of an issue is this amongst people who are looking at retirement? It\u2019s a very big issue and it\u2019s kind of, you know, a difficult topic to talk about because we have a lot of people in our society who are quite under saved, uh, relative to what they will need for retirement.<\/p>\n They\u2019ll be exclusively dependent on social security, but there\u2019s also a. Segment of our population who struggles with spending appropriately. I can\u2019t tell you Barry, how many times I\u2019ve been out speaking to a group of older adults and I\u2019ll have someone come up at the end of one of my sessions, clearly in his or her eighties, usually his, um, based on the com composition of the audiences I usually speak with.<\/p>\n Um, and he\u2019ll proudly say I only spend 2% of my portfolio per year, whatever the value is. That\u2019s what I spend. And I kind of think to myself, well, gosh, I hope that that delivers you a good quality of life. And I also think to myself, you\u2019re probably pretty significantly short changing yourself if you\u2019re just spending at, at that level.<\/p>\n And as you said, Barry, I hear this from financial advisors as well, that they struggle getting their clients to spend appropriately. I, I heard, um, a funny line from, um, a parent. Older clients who were getting on a plane and they were sitting in first class and they bump into friends they know who are sitting in coach, and the conversation was they just could imagine each other\u2019s conversation.<\/p>\n Look at them sitting in the front of the plane, spending their kids\u2019 inheritance, and then the one sitting in the front of the plane saying, can you imagine they\u2019re flying coach so their kids can fly first, ca first class? It\u2019s kind of funny, but ultimately, isn\u2019t this a psychological struggle about not just outliving your own money?<\/p>\n Uh, assuming we\u2019re talking about people who aren\u2019t gonna outlive their own money, there\u2019s still this enormous hesitancy to spend their kids\u2019 inheritance or to spend money when they\u2019ve spent their whole lives as savers. Tell us about that. Exactly. It\u2019s a sense of identity. I think that one builds as a saver and an investor that you are someone who defers gratification.<\/p>\n You set money aside each month and the further you go along in that journey, probably the more successful you are. Um, you get to see the incredible power of compounding. I think there is a common tendency to kind of anchor on the. Portfolio\u2019s, high watermark to think, well, if it\u2019s here, I never wanna see it go lower.<\/p>\n It just does not feel good to see the balance go down after a lifetime of seeing it generally escalate. So there\u2019s a lot going on psychologically and kind of the elephant in the room, um, in this respect is long-term care. Mm-hmm. That people who have. Not purchased long-term care insurance and may have really good reasons to not have done so.<\/p>\n Still have this, uh, risk of like, oh, may I have this balloon payment at the end of my life where, you know, I could get stuck with years and years of expensive care. So I think that that is a real risk factor that that is in the mix as well. Really, really interesting. Um, so since we\u2019re talking about long-term care, let\u2019s talk about generally putting together a personalized plan, thinking about needs and goals, lifestyle considerations.<\/p>\n \u00a0<\/p>\n What should someone who wants to spend more of their money do in order to feel comfortable that they can afford to spend a little cash? Well, I would say, um, either get a financial advisor to help you with this, where they\u2019re effectively dispersing a portion of your portfolio to you per year if you\u2019re doing it on your own.<\/p>\n \u00a0<\/p>\n Get familiar with the research on safe spending rates. A lot of the research that\u2019s been done by our team and others points to the value of. Being flexible with your portfolio withdrawals, where you are taking more, when your balance is up, when the markets are up and you\u2019re taking a little bit less when things are down.<\/p>\n \u00a0<\/p>\n Um, I think if people understand the data that we have on retirement spending, one thing that we know is that people tend to spend less as they age. Um, so you\u2019re. Early years of retirement should be the higher spending years of your retirement because that\u2019s usually when people\u2019s health is good. Um, they are, uh.<\/p>\n They may have pent up demand to do travel. They may be launching adult children. A lot of things going on at that life stage, you should give yourself permission to spend a little bit more early in retirement with the knowledge that even when we look at spending trajectories among very wealthy households, people spend less as they age.<\/p>\n So if you\u2019re okay with that, trade off with the idea that you probably will spend less, you should give yourself a little bit more license to spend earlier on. So, so let\u2019s break those spending desires down. You mentioned travel, like it\u2019s easy to travel in your sixties and seventies than it is in your eighties and nineties.<\/p>\n Um, hobbies, legacy, philanthropy or charitable goals to say nothing of future healthcare needs. How should people organize their thoughts and planning for, for future spending? Yeah, I think it, it\u2019s helpful to get very granular about the budgeting, and I don\u2019t mean you know that you\u2019re nickel and dimming yourself and looking at every line item, but if you have, say, a big family trip planned in year two of your retirement, spend some time figuring out what the implications will be.<\/p>\n For your plan, for your spending in that year. Know that those big outlays won\u2019t occur every year, but actually spend some time mapping them out. And the nice thing about that is that in addition to it helping your spending plan, it will also help you get these plans off the ground, rather than having them as some, you know, sort of vague notion of.<\/p>\n Of things that you want to do. Um, you mentioned lifetime giving Barry to family members and charity. I have come to be a huge evangelist for this because when we look at the data on when people inherit money from their parents, they\u2019re usually in their fifties or in their sixties. Their financial fortunes are pretty well set by that life stage.<\/p>\n Whereas if you have young people in your life, whether children, grandchildren, nieces, nephews, you can make a. Big impact for them in that the twenties, thirties, forties, um, with home down payments or paying off student loans. And these don\u2019t need to be big ticket gifts. Smaller gifts can make a big impact.<\/p>\n I often talk about how my mom and dad gave my husband and me a little bit of padding for our home down payment on our first home, and that helped us get into a home that we were able to. Day in for 12 years, we lived it exactly in the community where we wanted to live. So having that discussion with your loved ones about the gifts that might help them, I think is, um, something that can add a lot of richness to someone\u2019s retirement.<\/p>\n I recall reading your piece, what was it in the fall last year or maybe, uh, around, around the holidays? Um, inter vivos transfers is the technical term, right? While you\u2019re alive. This seems to be increasingly modern development. Like I think back 25, 35 years, you didn\u2019t hear that much about it, at least outside of the top one or 5%.<\/p>\n \u00a0<\/p>\n Now it\u2019s fairly common for the X or boomer generation to help with a down payment or college, as you mentioned. Tell us about what you\u2019re seeing out in the world. How significant has this become? Is this, um, something around the fri fringes, or are we seeing a lot more intr vivos transfers today than say, 20, 30, 40 years ago?<\/p>\n \u00a0<\/p>\n I don\u2019t have any data on it, Barry, but my sense is that the movement to toward lifetime giving is picking up steam and not just for very wealthy people. I think sometimes people are put off by the term lifetime giving. It sounds very high brow, but it doesn\u2019t have to be. It can be assistance with some of those smaller, um, life achievements that that young people might.<\/p>\n \u00a0<\/p>\n Might wanna tick off their list. So I would urge planners and individuals pursuing their own retirement plans to think about building in some of those lifetime, uh, giving, uh, aspirations. And also, you know, there are really nice tax planning mechanisms that people can use to help them achieve, achieve those things as well.<\/p>\n Um, the donor advised fund for charitable gifts, especially. And why shouldn\u2019t you see family members, friends, whoever enjoy the benefits of your large S while you\u2019re still around? It shouldn\u2019t be just something you think about when you\u2019re at your estate attorney and you\u2019re signing a document and that\u2019s the last you see of it.<\/p>\n Why not get to enjoy your, your kids or nephews or whoever in a new house that you helped them get there? Exactly that. That is the huge side benefit of contemplating lifetime giving, so, so let\u2019s talk about a little more formal type of giving. You mentioned donor-advised funds, uh, philanthropy when it comes to both financial and estate planning.<\/p>\n Philanthropy is a big part of both retirement and estate planning. Talk a little bit about the idea behind. How families should be thinking about, um, managing philanthropy or donating to causes that are near and dear to their heart. Yeah, get, get some advice on the tax aspect of this.<\/p>\n The donor advised fund is a really nice mechanism for people of varying means, and it\u2019s especially appropriate for people who have concentrated positions in their portfolios, often employer stock, where you can kind of take a risk out of the portfolio, uh, and donate the, say, employer stock to the donor advised fund.<\/p>\n You can get, uh, a. A tax deduction on that contribution. And you can also, uh, remove the capital gains tax associated with that big gain in the position at, at the same time. And then from there on, once you\u2019ve established the donor advised funds, you can make those. Those charitable gifts on an ongoing basis.<\/p>\n So that\u2019s one strategy that I would say would be kind of a first line, uh, to consider for, for people of all levels of wealth. And then for people who are moving up and getting into retirement, um, using the, uh, the, the charitable qu. Qualified charitable distribution from IRAs can be a really nice strategy as well where you are giving a portion of your IRA once you pass age 70 and a half to charity and the, we\u2019ve seen a little in inflation adjustment in the amount that you can give, but it\u2019s now over a hundred thousand dollars per year.<\/p>\n It\u2019s a way to reduce the tax burden associated with, um, that IRA. So that\u2019s another strategy to consider. I just wish it were. Um, available to people of, of all ages where you could potentially lighten up your IRAA little bit and, and get a tax break and do some charitable giving. So we\u2019re talking about spending in retirement and, but we have yet to talk about drawing down portfolios.<\/p>\n Um, uh, bill Sharp, Nobel Laureate, uh, and, and a key, uh, person when it comes to both modern portfolio theory and understanding. Asset allocation has called this the thorniest problem in all of finance. Why is figuring out. How much to draw down your portfolios, whether just to live on it or for special spending.<\/p>\n Why is that such a challenging, um, set of numbers? The key issue is that you\u2019re dealing with a bunch of wildcards, so you have an uncertain time horizon. You don\u2019t know how long you\u2019ll live, and you may have a little bit of a window into that as you age, but most of us do not have that crystal ball, and then we don\u2019t know how the markets will perform over our retirement time horizon.<\/p>\n And then this recent inflation shock really illustrated the wild card that inflation is. For retirement plans. So you don\u2019t know how inflation will, um, play out over your horizon, so you don\u2019t know how much you\u2019ll have to elevate your spending just to kind of keep your head above water. So all of those things are super tricky to get.<\/p>\n To get your arms around And the key conclusion for a lot of people is like, well, I\u2019d rather be safe than sorry. I\u2019d rather be a little bit conservative if it means a very high likelihood that I won\u2019t run out. Um, but I do think the kind of one and done withdrawal rate, the 4% style guideline is, you know, maybe a good proxy if you\u2019re 50 and trying to figure out if you have enough.<\/p>\n But it\u2019s not a retirement. Spending plan because people don\u2019t spend that way. They don\u2019t just spend the same amount in a straight line adjusted for inflation throughout retirement. It\u2019s lumpier. So you have a sequence of return problem on the asset side, and then you have a front loaded spend on the consumption side.<\/p>\n That sounds like that could be potentially challenging with just a straight up 4%. Definitely. And then long-term care, which we talked about earlier, that\u2019s another wild card in the mix. So how often should retirees be reviewing their holdings? How often should they be making changes to their budgets? Is this a set and forget, or do you need to regularly be updating this?<\/p>\n I like the idea of doing it once a year as kind of a holistic strategy where you\u2019re checking up on your withdrawal rate, you\u2019re looking at what your portfolio could support in the year ahead, and you\u2019re doing a little bit of portfolio maintenance. So I\u2019m a big believer in the bucket approach to retirement income.<\/p>\n If you\u2019ve spent from that cash bucket in the previous year, you\u2019re also looking at your portfolio and. Deciding, well, where is a sane place for me to pull from if I need to top up that cash bucket to provide me with spending money in the year ahead? And you\u2019re also doing a little bit of tax planning as well.<\/p>\n So if you\u2019re subject to required minimum distributions, for example, you\u2019re figuring out where to where to go for them. So I think a good one, stop holistic portfolio review is, is fine for most retirees. And our final question. You talked about the difference between retirement spending and legacy planning.<\/p>\n Explain to listeners what that difference actually is. So, uh, I\u2019m not sure how to answer that question, Barry. Um, and it, it came from your article about your parents helping you with the down payment. Okay. Okay. Could you ask me again? Sure. So in the article you wrote about spending while you\u2019re still alive, talking about how your, your folks help you and your husband with the down payment for your first house, and how much that was, uh, a significant change to you guys personally explain the difference between simple retirement spending and legacy planning.<\/p>\n The term spending, I think is super loaded. When we tell people they should be able to spend X in retirement, I think they automatically jump to it means we\u2019re telling them to buy cars every year, even if they don\u2019t need a new one or go out to dinner every night. Even if. That\u2019s not really something they wanna do.<\/p>\n And so I think this term spending is kind of loaded, and maybe we\u2019re a little bit judgy about it, but I would urge people to think broadly about retirement spending and use their retirement spending. To do some legacy planning. So, you know, the example of our home down payment is one way that I think my parents pursued legacy.<\/p>\n They, um, you know, certainly made an impact on our lives. They kept us nice and close to them so that we were able to help them later in life because we lived nice and close by. So I would urge people to think bigger about retirement spending, that it should encompass some of these legacy goals and you should give your.<\/p>\n Yourself permission to gift to your loved ones during their lifetimes and during your lifetime. So to wrap up, everybody needs to plan for retirement, but we also need to think about our spending. The odds are that we\u2019re gonna spend more in the early parts of our retirement when we\u2019re still younger and more mobile than the latter part of our retirement.<\/p>\n And we really need to think about the prior. Standard of waiting till you are deceased for the monies to find its way to the rest of your family. Assuming you have enough money to live on and that you\u2019re not gonna outlive your cash, don\u2019t be afraid to spend a little money. Don\u2019t be afraid to donate a little money, whether it\u2019s family members or charity, while you\u2019re still alive and while you could see the benefits of your generosity, uh, with your own eyes.<\/p>\n I\u2019m Barry Rithltz. You are listening to Bloomberg\u2019s. At the money.<\/p>\n \u00a0<\/p>\n ~~~<\/p>\n Find our entire music playlist for At the Money on Spotify<\/a>.<\/p>\n \u00a0<\/p>\n<\/p>\n
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