Jason and Emilia discuss budgeting for spending during retirement.
To purchase your retirement budget calculator go to retirementbudgetcalculator.com.
Also visit, Bureau of Labor Statistics CPI Inflation Calculator at www.bls.gov/data/inflation_calculator.htm.
Below is the full transcript:
Announcer: Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. Now, here is your host Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio, so glad to have you tuning in this morning. It’s my good fortune to have Emilia Bernal in the studio with me this morning, Emilia, welcome back.
Emilia: Hello. Thank you.
Jason: Emilia, you had a little bit of the bug.
Emilia: I did, yes.
Jason: I didn’t share this with you, but there is a gentleman who reached out and said “Hey, what happened to the show last week? We didn’t hear you guys.” I wrote him back and I said “Emilia is not feeling well, her throat is kind of scratching.” He said that he’s praying for you, and thought that was-
Emilia: Thank you.
Jason: Isn’t that cool?
Emilia: Yeah, that is.
Jason: We’ve got these people from around the country praying for you when they find out that you’re not doing well.
Emilia: It’s helped so far, hopefully I don’t have any residual cough left in me. Yeah, I’m doing better, thank you.
Jason: All right. The episode today, we are on number 166, How To Budget For Retirement Spending. Which seems kind of weird, and we’ll talk about why in a minute. But, before we do, we like to start the morning right, two ways. The first one is with a verse, we want to renew our mind. This comes to us from Hebrews 10 verses 24 and 25. It says “And let us consider how we may spur one another on toward love and good deeds, not giving up meeting together, as some are in the habit of doing, but encouraging one another and all the more as you see the day approaching.” That’s great. Then, the second way we like to renew our mind around here, have a little bit fun at least, is with a joke, and you’ve got one for us this morning.
Emilia: I do. Get ready. What did the circle say to the triangle?
Jason: I don’t know, what did it say?
Emilia: I don’t see your point.
Jason: Wait, the circle said that to the triangle? I don’t see your point?
Jason: You would think the triangle would say that to the circle.
Jason: I don’t see your point, Emilia.
Emilia: My jokes need to get better then.
Jason: All right.
Emilia: Let’s go ahead and get started. How to budget for retirement spending. What is the most important number when creating a retirement plan?
Jason: Obviously, it’s how much do you spend. The entire planning process is based on that one number. This is an area I think a lot of people mess this up. I’ve been spending some time at Reddit, just kind of reading some of the people in the FIRE community, for those of our listeners that don’t know, FIRE is Financially Independent Retired Early. These are people that are retiring in their 40s, sometimes their 30s, but they’re retiring early. I think one of the mistakes that I oftentimes see people make is they’re talking about portfolio, rates of return, and withdraws that they can take from their portfolio based on these assumed rates of return.
Of course, the rates of return are all based on past performance, and historical data. A lot of these people in these communities assume that that past performance is going to continue forward, so that’s kind of what drives this whole early retirement. I really think if you want to have more confidence, you focus on the most important piece, which is the spending part. But you mentioned, as we were getting ready for this show, you said “Budgeting for spending.” That just seems kind of weird. You’re right. That is not what we think about. Usually, when we think about budgeting, what do we think about usually?
Jason: Yes, saving. Yeah. But, in retirement, we’re not trying to save more, we’re trying to spend and do so responsibly without [inaudible 00:03:44] in a position where we’re going to run out of money. It’s the most important number in the entire planning process. It’s the number that people put the least amount of focus into most of the time. I’ve probably worked with thousands of people, but I know hundreds for sure, you ask them how much money they’ve accumulated, and boy they can give you this really detailed holding analysis. They know the different mutual funds they have, and the different ETFs they have, and the different asset classes they’re invested in, they can show you the different accounts they have, their 401(k), their IRAs, and their TSP, and their Roths, and they’ve got all that figured out.
Then you ask them “How much do you spend?” It’s kind of like “Well, we’ve never really been good budgeters. We’ve just always had good income. We’re not really quite sure how we spend.” But really, what people want to know is are they going to burn through all of their retirement savings as a result of not working anymore? The only way we can really understand that is by understanding the spending. A bad retirement planning scenario, Emilia, in my mind is you say “Okay, I’m done working, I’m going to retire. I haven’t figured out my spending.” Then you start pulling more money out of your portfolio than it can really sustain, and you end up burning out of money early in retirement. We want to avoid that. I think that’s people’s biggest fear, their biggest concern.
Emilia: Yeah. Jason, you invented the Retirement Budget Calculator. How is this different from other budget or spending calculators?
Jason: Yeah, a lot of times I hear people say “Oh, we use YNAB, or Mint, or Quicken.” Those are cool tools, those are really great, especially for people that are trying to get their money under control. The Retirement Budget Calculator thinks completely different about money than those tools do. Because what we want to do is create a spending plan. A spending plan has to do with what you’re spending is going to be in retirement, but it’s also looking out into the future. Into the future we have inflation. While a lot of those tools are good, those other ones that I mentioned, they’re great tools for budgeting like on a monthly basis, or a weekly basis, however often people like to budget. But, that’s not what the Retirement Budget Calculator is about, it’s not sitting down and micromanaging your money every week, it’s about putting together a spending plan so that you can see how inflation is going to affect the budget, and how the budget, or that spending is going to change over time as you transition through retirement. It’s a completely different tool, not to be confused with those other things, which are great tools as well.
I would encourage people continue to use those tools, even if they’re using the Retirement Budget Calculator, because again they’re just accomplishing two different things.
Emilia: Jason, you mentioned inflation, why is inflation important?
Jason: This is so cool. I pulled up … for our listeners out there, we’ll include this in the show notes if you go to Sound Retirement Planning, but there’s the inflation calculator that the Bureau of Labor and Statistics puts out so that you can see how your purchasing power has changed over time. If you plug in $10,000, you say “What was the purchasing power of $10,000 in January 1970? How much money would you need today in 2018 to have the same purchasing power?” You’d need $66,000 just to have the same purchasing power [crosstalk 00:07:02]-
Emilia: I think I just got the chills.
Jason: Isn’t that crazy?
Emilia: That’s crazy.
Jason: Isn’t that crazy? It’s a really fun exercise, but we know that the Federal Reserve wants inflation, they say that they have a 2% inflation target. What we know is that we all want to avoid deflation, that’s when we are losing purchasing power, that’s kind of what happened during the Great Depression. We definitely don’t want a deflationary environment. Inflation is a sign of a good, healthy economy. If we look at $10,000 back in the year 2000, that was 18 years ago, and we say “How much money do we need today to have the same purchasing power just back in the year 2000?” Today we need $14,784. Even in that short period of time, there has still been inflation, even though we’ve been through a period of really low inflation as measured by consumer price index.
We’ve got to be thinking about the future cost, not just the cost today. It’s not a static, we don’t live in a static world. Your life cereal and your [inaudible 00:08:04] are getting more expensive all the time. I think the boxes are shrinking too, frankly.
Emilia: I’ve heard that.
Jason: Have you noticed it?
Emilia: Yes, they say that things are changing, but they look like they’re bigger, they just change the shape of a box, so it looks like it has more in it, or things like that, but yeah.
Jason: It sure seems deceptive sometimes. But, I remember the first time when soda manufacturers came out with those little mini cans, did you see those? Have you seen those little mini-
Emilia: Yes, I started getting them because I never finished the full soda.
Jason: Yeah, I like them too.
Emilia: Me too, yeah.
Jason: Yeah, and I like my ginger ale. But, the first time I saw those, I didn’t realize what was happening, and I thought to myself “Oh, my goodness, you got to be kidding me. They shrunk the size of the can of soda to these little micro cans.” I thought to myself “Now there is inflation for you.”
Emilia: Yeah. Aren’t they a little more expensive when it comes down to the amount of soda that you’re buying? Is that why?
Jason: Probably. I haven’t done any analysis on it. The other thing I wanted to say about inflation, there are a couple things, Emilia. Number one, the CPI is a good number, some people take issue with the CPI, especially for retirees, because it doesn’t take into consideration like food, and energy, and some of those topics. We had a gentleman on the radio show a couple years ago from the American Institute for Economic Research, they put together an inflation index called the Everyday Price Index, that’s going to, I think for many retirees, probably better reflect where they’re spending money on a daily basis. Those are two good tools. You’ve got the Bureau of Labor Statistics, the Consumer Price Index, CPI, and then you’ve got the Everyday Price Index that the American Institute for Economic Research puts out.
That’s at least a starting point. But one of the things that we did with the Retirement Budget Calculator, which is so cool, and again this makes it totally unique compared to every other financial tool out there that I’ve seen, is that we allow you to assign a different inflation factor for each one of your different expenses. For example, if you’re going into retirement and you still have a mortgage, a mortgage is a fixed expense, that has a zero inflation factor, that’s not going to go up. Now, your taxes in insurance may go up, and you can break that out in the Retirement Budget Calculator.
But, medical costs in recent years have been going up at an inflation rate greater than overall inflation. Maybe for your medical insurance, you want to assume a higher inflation rate for that. It just really helps you get granular so you can see, so you don’t mess up your retirement as a result of underestimating your spending as you’re transitioning through retirement.
Emilia: Is this what you would refer to as essential versus discretionary expenses?
Jason: No. Inflation being different [inaudible 00:10:47] essential versus discretionary. Essential versus discretionary, that’s another thing that we do in the Retirement Budget Calculator that makes it unique. Is it we allow you to tag different expenses based on whether it’s essential or discretionary. An essential expense would be something like a mortgage. If you have a mortgage, you don’t want to miss your mortgage payment. Essential expense would be something like your food. Obviously you need to be able to eat in retirement.
Discretionary expenses are going to be things like travel, maybe you want to go out to the movies, and maybe you want to dine out. I guess, discretionary is going to be different for everybody. Some people might say dining out is an essential expense, and other people might say it’s discretionary. But, it’s one of the great things about the Retirement Budget Calculator, is that you can differentiate between your essential versus your discretionary. Why that is so important, Emilia, as you’re heading into retirement, you don’t want to gamble on your essential expenses. You need to have a great degree of confidence that that basic need is going to be met. You don’t want to have to worry about going back into work once you’ve retired.
What I found is that if you can have a great degree of confidence, that the income that you have coming in is going to cover at least your essential expenses, so that if things do go south in the economy, if the stock market does blow up, at least you know that your basic living expenses are going to be met. Yes, you may have to reduce the RV trip around the country, or maybe take fewer cruises in retirement, or whatever some of those discretionary items may be. But, we’re not gambling away your security, your food, your mortgage, your ability to buy, and put milk in the refrigerator, and some of those things.
Emilia: Yeah. I’d like to just take a minute, Jason, because combined with the Retirement Budget Calculator, you also have monthly webinars that help people to plan and make these essential decisions basically. We do have a webinar scheduled for Wednesday April 25th, at 5:30 p.m. Pacific Day Time and 8:30 p.m. Eastern Time. If you’re interested in getting some more information on that, go ahead and go to SoundRetirementPlanning.com and you can register for the webinar. Just take me back to the Retirement Budget Calculator. You mentioned discretionary and essential, so why are one-time expenses important then?
Jason: Yeah. Again, we’re trying to … the reason that very few people focus on this, is because it’s not … there’s a lot of moving parts. It can feel overwhelming. It’s hard to take into consideration all of these little nuances in a spreadsheet, because I built a spreadsheet first before we built the software. Some of the if then else statement were like 35 statements long. That’s a big, it’s like a five megabyte Excel spreadsheet. It starts to get very weighty. It actually works better in a database that you can save online and you can update it as life changes over time. The Retirement Budget Calculator is better.
But, for example, let’s say people decide that they … with property taxes for example. Let’s say their mortgage is paid off, they pay their property taxes once a year, that’s not a monthly expense. If you go and use something like, Vanguard has this very simple monthly spending calculator that they’ve created, it’s very, very simplistic, and it just basically gives you some kind of core expenses. But, things like an annual expense, what are you going to do? Are you going to average that out over 12 months and then inflate your monthly budget to try to match it? Or what the Retirement Budget Calculator allows you to do is to just set that aside so you can get a [inaudible 00:14:35] review of your expenses.
So, if you’re going to pay your property taxes in June, you can actually see that increase in the month of June. You don’t have to increase your monthly budgeting. One of the reasons I say that this is important, Emilia, is because in the financial planning world oftentimes we talk about sequence of return risk. Sequence of return risk has to do with how the stock market performs right when you retire. One of the biggest risks people face is that right when they retire, when they start pulling money out of their investments, if the stock market tanks that same time, that’s like the worst case scenario.
There’s also something that we call sequence of spending risk. Nobody focuses on this, but the outcome can be exactly the same. If you spend too much in those early years without understanding how it’s going to impact the future, you could end up running out of money early. The Retirement Budget Calculator is all about helping people understand what their spending is. Again, we’re not trying to budget to save money, that is not … I mean, most of the people we work with are millionaires, they’re not trying nickel-and-dime themselves and micromanage their money. What they’re trying to do is understand how much money they spend so that they don’t run out of money in retirement.
Emilia: That’s very important. Overspending is the problem right? What are the categories people need to think about when creating a retirement spending plan?
Jason: That’s a great question. When we created the Retirement Budget Calculator, we built all of the categories into the calculator. Not only did we create all of the primary categories, but we created all of the subcategories as well. Let me give you a quick example. The primary categories are housing, loans and liabilities, food and personal care, insurance and medical, vehicles and transportation, travel and entertainment, and giving and miscellaneous. That’s how we’ve broken down the primary categories.
Within each one of those primary categories are subcategories. For example, let’s say we look inside the Budget Calculator at housing. Within our housing we may have property taxes, we may have a water bill, a sewer bill, maybe natural gas, cable, internet. We can really get granular with our Retirement Budget Calculator. One of the things we wanted to do is make it completely customizable, so people can add their own categories. We provide you with a lot of categories to help people make sure they’re not missing things. But they can delete those out, they can add their own in, they can make it completely customizable to them.
One of the things we wanted to do too, a lot of the tools out there like the Personal Capital’s, the Mint.com, they all want to link to your bank accounts and your investment accounts, and then pull data directly in. You’re giving up a lot of privacy when you do that. That was one of the things we wanted to stay away from with the Retirement Budget Calculator. This is a tool that doesn’t connect to your bank accounts, because we wanted people to have that sense of privacy to know that they don’t have to share all of their financial information with the tool [inaudible 00:17:41] to be able to come up with a good plan.
The other thing we wanted to stay away from, it’s not advertisement driven tool. A lot of the tools out there are either trying to get you to use their investment management services, or they are showing you advertisements all the time based on what your financial picture looks like. We made the Retirement Budget Calculator a tool that you spend money. You pay a one-time fee to have access to it. In exchange for that, you don’t have to deal with all the ads, and you don’t have to give up your privacy. I think in the world we live in today, that that’s really important to people. They want to know that their information is not being used to necessarily target them every time they turn a corner. That’s what the Retirement Budget Calculator does, it keeps their information private. It helps them understand the categories, helps them understand the subcategories of all of the spending that we’re looking forward to them doing.
This is the reason they saved the money. This is a good thing. You’re going to spend this lifetime of savings. But it’s also scary, because people, they condition themselves, they’ve become savers their whole lives, and now we’re asking them to flip that all on its head and say “We don’t want you to save anymore, now we want you to spend everything you’ve got.” That’s just after 30 years, or 40 years of working, that’s hard to do.
Emilia: Yeah, right now I’m kind of in that saving mode. Me and my husband get so excited when we see our savings grow or something gets done, we’re like “Wow, this is working.” But yeah. Jason, can you let our listeners know how they can get a special price on the Retirement Budget Calculator?
Jason: Yeah. When you go to check out, if you put in the term podcast all one word, you’ll see the price get cut in half. It’s a 50% discount for our listeners, so all they have to do is put in the term podcast, they can pay for the Retirement Budget Calculator. Again, it’s a one-time fee. The other thing I wanted to stay away from with this is all of these financial tools that are being developed today, they’re all requiring monthly subscription costs. That drives me crazy. Because you just kind of get nickled-and-dime over a long period of time with these monthly subscriptions. The Retirement Budget Calculator does not require a monthly subscription, it’s a one-time fee to have access to it.
We keep making it better. I think i sent out three emails in the month of April telling our listeners about, or telling our subscribers about new enhancements we’ve made. We’re always making the Budget Calculator better. In fact, we just had a meeting last night to talk about the next set of functionality that we’re going to be bringing to the Retirement Budget Calculator, so I’m really excited about that.
One of the other things I wanted to talk about, Emilia, from a personal budgeting standpoint is cash envelope budgeting. I really think there’s something powerful to not using debit cards and credit cards. Those tools, and it’s not to say that we don’t have them, we do have access to them in our family, but what they do is they encourage overspending. When you put cash in an envelope it creates artificial scarcity. One of the things that we’ve done in the Retirement Budget Calculator, and we did this just because this is how my family budgets, so I wanted to have that functionality in there. But, we have the ability to, for the expenses that we do want, to have tags as cash, so that I can go over to my monthly details report, I can run a report on the first, when I get paid, or I can run a report on the 15th, when I get paid, and say “Show me all of my expenses that need cash for this month.”
Then, when I deposit my paycheck, I just take out that amount of cash, and I bring it home, and I stick it in the envelopes, and it’s just a wonderful way to tell your money where to go instead of spending your time trying to wonder where your money went. That’s ultimately what budgeting does. For people that do want to use it as a tool to stay on top of their money, they certainly have the flexibility to use it that way. But, it’s not a tool that you have to download all of your bank transactions into, and then categorize them, and split them, and all that stuff. That’s really not what this is designed to do. It’s designed to help people spend money in retirement.
Emilia: That sounds like a great tool. I think it’s helpful for anybody. It probably even had [inaudible 00:21:51] sounds like it. Even for somebody that’s getting ready to retire. Yeah. Just preparing for everything.
Jason: The people that, I mean, the people that this was designed for are high net worth individuals, high income individuals. They generally don’t have a spending plan because they have really good income. I mean, when you’re making a couple hundred thousand dollars a year, you’re not tracking every penny. But, when you retire, now you’ve got this chunk of money that’s going to last through the rest of your life. You got to know where your money is going. All of a sudden, it becomes much more important. The people I think are really going to benefit the most from the Retirement Budget Calculator are people that are wanting to retire, they want to understand the spending, it drives the rest of the equation, a really simple formula. Once you understand, once you use something like the Retirement Budget Calculator and you understand what that annual number is, then you just take your annual spending and multiply it.
If you want to assume a 4% withdrawal rate, you would multiply it by 25. For example, let’s say that I want to spend $40,000 a year. I would take $40,000, multiply it by 25, and that would tell me I would need $1 million in order to take a 4% withdrawal from that portfolio, and equal the $40,000 that I need. Some people in the financial planning community are saying a 4% withdrawal rate in today’s environment may be a little on the rich side, given where the price of stocks are and the price of bonds are. We know we’ve got a rising interest rate environment putting pressure on bonds. We’ve got stocks trading at some all-time highs.
Some people in the academic community are saying “Hey, maybe we should assume a 3% withdrawal rate going forward.” If you do that same math, say you could take your $40,000, again, I want to spend $40,000 a year, multiply it by 33, and that would tell me that I would need about $1.3 million in order to sustain that $40,000 a year spending at a 3% withdrawal rate. Again, just real simple once you understand your spending multiply it by either 25, if you’re going to assume a 4% withdrawal rate, or 33, if you want to assume a 3% withdrawal rate. Then, that will get moving in the right direction to kind of answer the question. Because there’s one thing that a lot of people ask of us is they say “Hey, have we saved enough?” Emilia, I just realized we’re out of time.
Emilia: All right.
Jason: I started rambling again.
Emilia: No, there we go. Great information.
Jason: All right. Until next week. This is Jason Parker signing out.
Announcer: Information and opinions expressed here are believed to be accurate and complete for general information only, and should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates, have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance-related discussions are subject to the claims-paying ability of the company. Investing involves risk. Jason Parker is the President of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue Northwest, Silverdale, Washington. For additional information, call 1-800-514-5046, or visit us online at soundretirementplanning.com.