40 Years in Retirement Planning — and I Disagree with the Experts!

When you want to retire in 5 years or less…

Let’s make this simple!

If you have an Investment Advisor, he’s probably asking…

1. How much is in your 401 (k) and other retirement accounts?
2. What’s the average rate of return on your investments?

As a Retirement Planner, I disagree! Your first questions to answer…

1. What does it cost to be me?
2. What lifestyle do I want in retirement?

We see this all the time.

You’ve had an “advisor” who really helped you grow a retirement account. You’re pleased with him and your account’s results.

Now, you’re looking at retirement, and you figure he can help you plan the financial portion of it.

Many of the larger firms you’ve probably heard of, such as Fidelity, Fisher Investments, and Vanguard, specialize in investments. Does that make them retirement planners?

First, if they specialize only in market investments, that has to be their focus.

Oh, you’ll hear ads that say they have “departments” that have “advisors” to help you with Medicare, Social Security, Estate Planning, and more.

Wait, let me understand this: you’re going to parcel out my needs to people who don’t know anything about me or my whole picture? Sure, they may have my investment records, but what do they know about my family, my goals?

That’s like going to different doctors for heart, kidneys, cancer, a fractured limb, and none of them speak to each other. Could the medicines interact and cause problems?

I can answer that! Remember Issue [#009] when I told you about my mother’s “Brown Bag Syndrome” from all the medications by different doctors that interacted and almost killed her?

One more caution: if someone is an advisor at one of these big firms, could they be directed to recommend only what the firm profits from?

I can answer that one, too! I started my career at a big firm. I must admit, I “drank the Kool-Aid” for many years. I believed that we had the best products, the best answers, and were always doing right by the client.

Then my “education freak” streak kicked in, and I started attending educational conferences outside the firm that were not company-specific.

What an eye opener! I learned of products and ideas that I never knew existed!

Translation…your “advisor” may not know anything about what’s available outside of his firm, nor have access to better solutions!

Also, think of it this way, if your grandpa is declining, and you need a doctor to figure out his problems, would you bring him to a pediatrician, who specializes in children, or a geriatric doctor who specializes in older patients?

This is the same concept! Your “advisor” who grew your account is a specialist in growing investments, but are they trained on all the nuances you’ll have to deal with in retirement?

Do they know how to insulate your account from large market losses in retirement?

We’ll discuss this further in another newsletter…

But first, what does it mean, and why do I ask…

What does it cost to be me?

Most of us don’t want to live on a “budget” in retirement. That means we must have the funds to spend as we do now.

What exactly does it cost to be me? What are your current expenses?

As a retirement planner, I’ve worked with thousands of people preparing for retirement. We always ask, ‘What are you currently spending every month? Annually for extras?”

I have NEVER met someone who overestimated their expenses. However, at least 98% UNDERESTIMATE their current expenses, most by thousands every year!

How do we know this? We not only give them an “Expense Worksheet”, but also look at what’s left in the bank every month.

Can they explain how they can claim their expenses are just $6,000/mo, when their net income after taxes is $14,000/mo, and they have only $10,000 savings for the year and a $15,000 balance on their credit cards?

These are not stupid people; they have just always had enough income to do whatever they wanted without worrying about how much it costs! So they have no idea what they’re spending, they don’t HAVE to know!

First, let’s decipher what TRUE expenses are. Where is the income going? Let’s look at “BODE”:

B = Basic Every Month: mortgage, home & health insurance, utilities

O = Operating Expenses: food, clothes, home repairs, cell phone, internet, etc.

D = Discretionary: Starbucks, eating out, McDonald’s, snacks, Amazon…

E = Entertainment: Vacations, trips, movies, concerts, Netflix, sports, etc.

Why do we recommend “BODE” for expenses?

This will bode well for you! (Pardon the pun!)

Most of us think about “B” as our expenses. They’re not our ONLY expenses, but they are virtually “mandatory”.

Unfortunately, most people underestimate the “O”, operating expenses, and severely underestimate “D”, the discretionary.

Only an inventory of credit cards and bank statements will give you an accurate picture, and that picture can change from year to year. The good news?

You have CONTROL over that! You may not have looked at your cell phone bill in a while. Are you still paying for your son, who earns more than you do?

Did you know there are cell phone carriers that use the same technology as the major carriers but cost half as much?

Sure, you ate out 3 times a week when you were working…is it a habit now? Or might you enjoy more home-cooked meals?

Stopping at McDonald’s for a $1.25 coke (Really?) or a $10 Starbucks two or three times a day can drain your account quickly. Hmm, $30/day is $900/mo.!

And don’t even look at your Amazon account…it’s so easy to get a new item delivered! No getting in the car, driving around, you don’t even have to take out your credit card (It’s on file!).

Now, I’m not telling you to stop discretionary spending, just be aware of it to plan better!

Then we have “E”, entertainment. This is what we PLAN on doing in retirement, isn’t it?

When we teach clients how to decipher their credit card statements, including the stops at Starbucks, taking the grandchildren on vacations, and supplementing a grown child’s income for their apartment, it becomes clearer where the money went!

In some extreme cases, we’ve talked them into the most revealing practice we’ve ever used with clients. Keeping a DAILY log for one month of money going out… even what they stop at Starbucks and pay cash.

This used to be quite arduous, but it’s much easier today because most everything will be on your credit card or bank statements! This exercise can save your retirement from disaster! (Because you WILL know where the money went!)

Of course, we’ll also have to account for semi-annual and annual payments, such as homeowners’ insurance and property taxes, but that’ll also appear on a statement.

If you’re shocked at how much you’re spending…that’s OKAY!

As long as you can sustain that lifestyle in retirement.

Now we go to question #2:

What lifestyle do I want in retirement?

This is KEY! We don’t want to retire to live a minimalist lifestyle, afraid to spend a dime!

What DO you want in retirement?

Some dream of long vacations, cruises, and splurging on trips to Disney World with the grandchildren.

Some dream of staying home, spending more time with family and friends, and enjoying hobbies they’ve never had time for!

Everyone’s dream retirement is individually their own!

But how do we plan that retirement, what savings we need, what income we need if we don’t know the target?

What’s the best road to take on a trip…if we don’t know where we’re going?

Aah, there’s the reason the first question you should ask when you start thinking about retirement is not how big is my retirement account, or what is my investment return, but what are my expenses, and what is the lifestyle I’m aiming for?

We can’t build a roadmap if we don’t know the destination! What is yours?

One person may only need 70% of their pre-retirement income because they already live a minimalist lifestyle they enjoy, have paid off all debt, including their mortgage, and will no longer contribute to retirement accounts.

While another couple needs at least 100% of their current income, because although they’re no longer contributing to a retirement account, they plan on paying for two daughters’ weddings (in the same year, like one of our clients!), enjoy spending on mocha lattes, dinners out, and short vacations.

Then we have those who have always dreamed of their “Golden Years”…

All their careers, they’ve been waiting to take month-long cruises, buying that expensive car they’ve always wanted (but didn’t want to drive to work), traveling in a decked-out RV around the country to visit the children and grandchildren and never worrying about paying for anything they felt like at that moment. They may need 150% of their pre-retirement income!

Unfortunately, all of the above may need more than they anticipate to cover inflation over the next 30 years of retirement and the long-term care that 70% of people will incur at some point in their lives. (Although, we’re all sure, “It won’t be me!”)

There’s a very revealing article in U.S. News and World Report:

https://money.usnews.com/money/retirement/articles/the-hidden-costs-of-retirement-why-your-expenses-may-be-higher-than-you-think

When we’ve answered the question, “What does it cost to be me?” we know how much we need to spend at a minimum, but does that tell us how much income we need in retirement?

NO, it does not! Not even in the first year…. Much less later with inflation!

This leads us to one of the most common mistakes people make in retirement planning…

You can only spend “net” income, that is, what’s left after you pay your state and federal income taxes!

So how do you figure out what income you’ll need before you pay taxes?

That’s the “Tax Trap” many fall into; it’s a math calculation, my friends!

(Sorry about that, I was both an English and a Math teacher in a former life!)

So how much income do you need BEFORE you pay taxes, to have enough net to create your desired lifestyle?

It can be quite scary to realize how much MORE you need before taxes, even in states without income taxes!

Why?

Because the Federal Tax laws will apply to ALL your income streams, except for Roth Accounts.

This is where a good retirement planner, or educational membership like our soon-to-be-released “Retire Plugged In,” can help.

Although most of us will need to use our IRA’s, 401(k)s, etc., in retirement, some don’t need them for income.

If that’s you, be aware that you WILL make withdrawals and pay taxes, whether you want to or not. You see, you made a deal with the devil!

The devil said, “I’ll give you a tax deduction, and let you grow that account tax deferred”, but in exchange, he put a “mortgage” on your retirement account.

Now, it’s time to pay up! It’s called Required Minimum Distributions (RMDs).

What? I have a mortgage on my house, but not my retirement account!

Really? Here’s a short video explaining your home mortgage vs. your IRA Mortgage:

https://vimeo.com/1200251962

When we’ve determined the answer to these two questions FIRST:

1. What is the minimum income I need (before taxes!) to cover my “basic” expenses?
2. What retirement lifestyle do I want, and what extra income will it take?

(Lifestyle includes ALL of “BODE”, not just the Basic!)

Then we can look at the investment advisor’s questions:

1. How much is in your 401(k) and other retirement accounts?
2. What’s the average rate of return on your investments? (Which doesn’t matter near as much as they’d have you believe!)

Next week: Why WHEN You Retire Matters More Than Your Rate of Return

Okay, I’ll leave you with that for now.

Have a great rest of your day, and I look forward to seeing you next week.

Take care,

Nora