How Your Spending May Save Your Retirement With Mark Biller

Christian talk radio with Rob West

Countless believers have gone to Jeremiah 29 for comfort over the centuries, including about their finances. We’ll talk with Mark Biller today about a more hopeful future for your retirement savings. For I know the plans I have for you, declares the Lord, plans for welfare and not for evil, to give you a future and a hope. Jeremiah 29: 11 Mark Biller is executive editor at Sound Mind Investing where they watch and read financial forecasts so you don’t have to. If you read enough retirement headlines, you might get the impression that you’ll never be able to retire. A couple of recent ones we mentioned in the article came from Fidelity. The first said a 40-year-old with household income of $100, 000 should have 3 times that amount already saved for retirementat age 40. By age 60, they said the multiple should be 8 times income. A second scary sounding Fidelity study said a 65-year old couple retiring today should expect to spend $315, 000 for healthcare over the course of their retirement, not including the potential need for nursing home or other long-term care. As you know Rob, SMI is all about prudent planning and preparing. And I’m not even saying these studies are flawed or inaccurate. But the problem is these types of numbers can sound so unattainable that it can make some people give up even trying to save for retirement. What assumptions did Fidelity make in coming up with its conclusions? The framing of the results are often intended to deliver a psychological blow to the reader. For example, that $315, 000 retirement health care number if you break that down to a monthly figure over a 20-year retirement, it’s about thirteen-hundred dollars a month. Between health-insurance premiums, contributions to a Health Savings Account, and various out-of-pocket costs, that may be less than many pre-retirees are already spending for healthcare. One of the most important factors missing from a lot of retirement-planning discussions is the fact that your expenses are likely to be less in your later years than they are now. And they’ll likely decline further as the decades pass during your retirement. That’s a big issue if you’re taking the approach a lot of people use, which is to say I need to replace a certain percent of my income when I retire, and then just increase that number by 4% or some other inflation figure every year until I die. WHY EXPENSES MAY DECREASE WHEN YOU RETIRE Many expenses that people have during their working years don’t continue, either at all, or at least to the same degree, after retirement. That’s why financial advisors often use some percentage of your current budget as a starting point for determining an appropriate retirement budget. But the actual change in fixed expenses can vary quite a bit from one retiree to the next, so it’s important to consider how your specific expenses are likely to change. Here are a few of the big examples of expenses that tend to decrease in retirement: ● Employment Costs. Once you retire, you no longer pay payroll taxes, and you may save on other work-related costs like commuting, work-related clothing, and so on. ● Saving. After you retire, you won’t be saving for retirement anymore; you’ll be spending the money you’ve already saved. So think about how much you’re currently contributing to a workplace retirement plan or IRA you can subtract that amount from your retirement budget. ● Then there’s Kid Costs. Are you still saving for your kids’ college expenses? Assuming they’ll be done with college by the time you retire, take those costs out of your monthly retirement budget as well. Also, if you still have children at home, think of all the money you’re spending for their clothing, activities, healthcare, food, insurance, cell phones, and so on. Most, if not all, of those expenses are likely to disappear in retirement. ● And finally, Housing. One key pillar of wise retirement planning is to enter retirement with your mortgage paid-off. If you’re on track to pay off your home by retirement, you can subtract your mortgage and interest payments from your retirement budget. And of course, some retirees downsize, which can lead to lower costs for taxes, insurance, maintenance, and utilities. How much we’ll spend on various things will change during the course of our retirement. That’s because there are different seasons of retirement. In the book, The Prosperous Retirement, financial advisor Michael Stein describes three phases of retirement: he calls them the go-go, the slow-go, and, a little more ominously, the no-go years. In the first phase, roughly age 65 to 75, retirees tend to be active, they’re spending on travel, dining out, and other activities. This is the high-spending phase of retirement. The slow-go years, roughly age 75 to 85, are marked by decreased spending to the point that household expenses don’t even keep pace with inflation. And in the final no-go phase, from age 85 on up, there is typically little travel and generally modest discretionary spending. Recent government statistics support this rough framework as well. Households headed by 65 to 74 year-olds spend 19% less than those headed by someone age 55 to 64. And those headed by someone age 75 or older spend 22% less than those with a head-of-household age 65 to 74. So from those go go retirement years to the slow go period, spending dropped roughly 22%. SPENDING INCREASES IN RETIREMENT But some expenses will increase in retirement. Out of the 14 broad spending categories analyzed in the government stats I just mentioned, most showed decreases in average spending by the oldest households. However, a few, such as cash contributions (which would include charitable giving and support for other family members), reading, and not surprisingly healthcare, showed increases. Healthcare IS the main wildcard when it comes to later-life spending - it can increase a little or a lot. To prepare, once you turn 65 and qualify for Medicare, it’s important to understand what that plan covers and doesn’t cover. For many listeners, it may be wise to add a Medicare Supplemental (Medigap) plan or consider a Medicare Advantage plan, which may cover some expensive items, like hearing aids, that aren’t covered by traditional Medicare or Medigap plans. A prescription drug plan may also make sense. One thing current workers can do to prepare for this is if you’re covered by a high-deductible health-insurance policy, try to max out your annual contributions to a health-savings account. That balance can be carried into retirement to help cover future medical costs. And of course there’s always the question of long-term care insurance, especially if you have a family history of dementia. KEY POINTS TO REMEMBER It’s easy to believe that you need to replace your entire current income to live comfortably in retirement. And even for those who try to account for lower expenses in their later years, there can be a danger in relying too much on general rules of thumb, like the need to replace a certain percentage of your working age income and so forth. We think It’s much better to take a thorough look at your own actual current spending. Look at what categories may disappear entirely or at least decrease, as well as any that may increase, and develop your own retirement budget based on that. Here’s a hopeful expert quote to end on: from Wade Pfau, who is a Professor of Retirement Income and author of the Retirement Researcher blog - he says: Suggesting that retirees should plan for constant inflation-adjusted spending may overestimate the required retirement savings that many households will require for a successful retirement. Learn more about Sound Mind Investing at SoundMindInvesting. org. On today’s program, Rob also answers listener questions: ● Are bonds the safest form of investment in the current economy? ● Do you have to pay off a loan from your 401k before retirement? ● What is the best way to invest $2, 000?