Stephanie McCullough (00:00):

If you were to come to us, to me and Kevin as financial planners and ask, “Am I on track to retire? Can I retire tomorrow? Am I okay to retire in five years?” We’re going to come back at you with a whole bunch of questions. One of which, and probably one of the most important of which would be, well, how much does life cost you? And today, we’re going to get into some of the problems with that.

[Intro Playing]

Stephanie McCullough (00:36):

Hey, dear listeners, we need to let you know that Kevin and Stephanie offer investment advice through Private Advisor Group, which is a federally registered investment advisor. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations to any individual.

Stephanie McCullough (00:54):

To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Now, let’s get on with the show.

Stephanie McCullough (01:11):

This is Take Back Retirement, the show that’s redefining retirement for women. Retirement is an old-fashioned cultural concept. We want to reclaim the word so you can make it your own.

Stephanie McCullough (01:21):

I’m Stephanie McCullough, financial planner and founder of Sofia Financial, where our mission is to reduce women’s money stress and empower them to make wise, holistic decisions so they can get back to living their best lives.

Stephanie McCullough (01:34):

Kevin Gaines is my longtime colleague with deep knowledge in the technical stuff, investments, taxes, and retirement plan rules. He’s a little bit geeky and quantitative, I’m a little bit touchy, feely and qualitative. Together, through conversations and interviews, we aim to give you the information and motivation you need to move forward with confidence. We’re so glad you’re here.

Stephanie McCullough (02:00):

Coming to you semi-live from the beautiful Westlakes Office Park in suburban Philadelphia, this is Stephanie and Kevin. Say hello, Kevin.

Kevin Gaines (02:08):

Hello, Kevin.

Stephanie McCullough (02:09):

This idea that whether or not you can retire and all the caveats on the problems with the concept of retirement and never working again and all of that, which we’ve addressed a zillion times. But still, when we’re doing retirement calculations, projections, the do I have enough? There is a problematic assumption that is rife in financial planning in our industry. Kevin, tell us what that is.

Kevin Gaines (02:38):

Well, so really what we’re dealing with is all the planning software, the online calculators, maybe your 401(k) statement shows a thing saying, “Oh, based off what you have now, this would be your annual spend.” The 4% rule and these other rules of thumb that are out there, at their heart, they’re spreadsheet solutions to answering this question of how much can I spend. And for those of you who played with spreadsheets, you can attest to this as well. Spreadsheets are great at math, they suck at flexibility.

Stephanie McCullough (03:17):

Flexibility, that’s, I think, what we’re trying to get at because all of these methods of calculating retirement have a key assumption. And that is that every single human or household or couple or whatever is going to spend the same amount of money every year adjusted for inflation until we die. That’s the heart of it.

Stephanie McCullough (03:41):

Like, oh, I can spend 4% of my pot of money going up by inflation until you die. But it’s a straight line. Or we think, oh, we do the calculations on what life is costing you. We add in some wiggle room, we add in some stuff for fun and holidays, and then we use that as a baseline number, and we increase it by inflation every single year until we die.

Stephanie McCullough (04:04):

But as Kevin and I get closer to aging, shall we call it, and just in more years of doing this work with actual clients, there are some issues with that idea that it’s a straight line, annual spending number that’s always going to be the same.

Kevin Gaines (04:24):

The first thing is, Stephanie, that we know we’re not going to be spending the same amount every year no matter how much we want to, just because some things happen in only one year. Child gets married, you want to move, you want to get a new car — whatever.

Stephanie McCullough (04:45):

Your roof springs a leak, you have major dental work, trees fall in your yard. We all know this shizzle hits the fan and life gets more expensive. Hopefully, these things don’t happen every year.

Kevin Gaines (05:01):

Yeah, that’s the key part, yes. Hopefully, they’re not happening every year.

Stephanie McCullough (05:05):

But there’s ways we can account for this in the projections. We can do kind of an annual average for home maintenance that might take into account, oh, I need new windows. That’s going to be more expensive, but some years is less expensive, or we can put in a new car every 5 or 10 years or whatever. We can do some things with that.

Kevin Gaines (05:23):

We can anticipate a wedding, we can anticipate moving.

Stephanie McCullough (05:26):

And if we get the year wrong, not a problem, really.

Kevin Gaines (05:30):

If we’re off by a couple, it doesn’t move the needle much.

Stephanie McCullough (05:34):

Yeah. So, the one-off things. And also, just life is lumpy, it’s unpredictable. You might plan a big trip and then someone needs shoulder surgery, and you don’t get to take it, so you maybe do a nicer one after recovery.

Kevin Gaines (05:47):

I mean, let’s face it, here’s a real-world situation that we had. A lot of clients a few years ago, shall we say, had big trips planned and all of a sudden, global pandemic hits and it doesn’t happen.

Stephanie McCullough (06:01):

How many people have you talked to like, “We’re taking this trip to Greece that we had planned for 2020 and we’re finally getting there?”

Kevin Gaines (06:08):

Correct. Yes. But to your point, we still had it accounted for. Fine, we adjusted the timing, but at least the numbers were there.

Stephanie McCullough (06:18):

Yeah. But there’s a bigger problem that again, in the decades Kevin and I have been doing this — we’ve become more aware of. And there’s people that are out there researching it, there’s people who are talking about it. Former podcast guest and hopefully again, future podcast guest, Dan Haylett talks about this in his work. We can point to some of their stuff. Just this idea that people don’t tend to spend as much as they get older.

Kevin Gaines (06:45):

We even have a nice little catchy phrase for it within the industry. We call it the retirement smile, which to me, it sounds a little evil once you understand what it’s saying. And frankly, when you see it on a chart, it’s not much of a smile either, if you ask me.

Stephanie McCullough (07:02):

But it’s also pretty geeky that it’s all about a chart. What’s the retirement smile? It’s a line of spending, if you’re charting, your spending year by year and what does it tell you?

Kevin Gaines (07:13):

So, right now, we’ve been saying your spending is the same every year.

Stephanie McCullough (07:18):

That would be a straight line, maybe going up slightly on a chart, on a graph.

Kevin Gaines (07:22):

Correct. But the reality is when we first retire, when we’re younger, when we’re healthier, we do a lot more stuff or want to do a lot more stuff. So, we spend more. So, our spending is higher.

Stephanie McCullough (07:39):

Sometimes called the go-go years.

Kevin Gaines (07:42):

And then as we get older, we start slowing down. Hopefully, we’re not talking about serious health issues or anything along those lines. We’re just not doing as much.

Stephanie McCullough (07:56):

Called the slow-go years.

Kevin Gaines (07:59):

The grandkids, they’re now older. They now have their own life, so you’re not doing all the stuff with the grandkids. You’re slowing down, you’re not taking as big of trips or as many trips. You’re staying more local, maybe. So, your spending decreases versus what it was in the go-go years. And then you get towards the end of your life, which is called Stephanie …

Stephanie McCullough (08:28):

The no-go years. Meaning you might need help getting from bed to the shower.

Kevin Gaines (08:34):

Right. And medical expenses increase. So, there is a slight uptick in spending versus the slow-go years because, well, it’s not cheap to be sick.

Stephanie McCullough (08:47):

So, I mean, there’s been some acknowledgement in the industry that this is kind of a trend, but I don’t know that that’s really kind of gotten to a good solution for people. Because we still see all these calculators that are out there, this is what you can spend from your 401(k) on your 401(k) statement.

Stephanie McCullough (09:08):

They give you a number, a straight-line number. And we’ve had a hard time convincing clients maybe to go up above that number because we do have that fear of running out. So, what does all this do? What is the practical conclusions that we can make as financial planners, as people who are trying to help their clients use their resources to have the most fulfilling, most impactful, perhaps, like the best lives they can with what they’ve got to work with. So, we have thoughts, unsurprisingly.

Kevin Gaines (09:47):

Imagine that.

Stephanie McCullough (09:48):

Well, and Kevin, you wanted to get into some of the math behind this. And I think it’s helpful, dear listeners, we will try not to overwhelm you with math, I promise. But conceptually, I think it’s helpful to understand kind of how some of these calculations work and what they’re being based on so that maybe you can kind of deprogram a little bit. Kevin.

Kevin Gaines (10:10):

So, yeah, let’s start with I guess, the OG of the number, if you will, which is the 4% rule.

Stephanie McCullough (10:17):

Give us a little tiny background on what the heck this 4% rule is.

Kevin Gaines (10:20):

So, when this rule came out, it said and this is-

Stephanie McCullough (10:25):

Based on a paper by who? Bill Bergen, right?

Kevin Gaines (10:27):

Bill Bergen, right. I mean, and he explicitly says, although everybody ignores this part, he says he was answering the question, what is the maximum amount I can spend over a 30-year period and not run out of money? So, that was a backwards calculation. It was saying, “Okay, how do I never run out of money, regardless of what the markets have done over history?”

Stephanie McCullough (11:00):

Even living through the direst circumstances.

Kevin Gaines (11:03):

Correct. And that’s where they came up with the 4% number. It’s like, okay, as long as you don’t spend more than 4%, there has never been a scenario in the United States, going back a hundred years in which this has happened, which you’ve run out of money.

Stephanie McCullough (11:21):

So, that means the 4%, if you picture it, listeners, he was looking at 30-year periods, every 30-year period, starting January of whatever year and then starting in February of that year, and many 30-year periods of time. And there were plenty of 30-year periods of time where you could have spent more than 4%.

Stephanie McCullough (11:42):

There were a couple that encompassed bad years at a bad time because the timing of when the bad market performance years hit matters. There were a couple of those where you had to scale back on the spending to order in order to not run out for 30 years. And that’s where the 4 came from. Is that a fair explanation?

Kevin Gaines (12:03):

Yes, but what that meant was, there have been many time periods that if you followed this 4% rule, you die with more money than you started retirement with.

Stephanie McCullough (12:18):

By design, again, that’s the problem he was solving for. He wasn’t saying like what’s a comfortable amount to spend in most places — he was saying in the direst of circumstances, what is the safe number? So, basically, the upshot is lots of people are underspending if they follow the 4% rule. Is that it?

Kevin Gaines (12:40):

Correct, yes. And ever since that, a lot of the tools we use, they go along a similar methodology of how do we avoid failure? And I’ll get into a whole another little geeky point, which is failure is defined as dying with less than zero. It does not tell you how bad of a failure it is. If you die overdrawing your checking account by $1 to pay the undertaker, that’s a failure.

Stephanie McCullough (13:17):

In terms of these softwares and what they’re talking about, yep.

Kevin Gaines (13:21):

And again, that’s saying you can probably, for many of us in many situations, you can spend more than a lot of these models are saying, especially if you take into account, you’re probably not going to be spending at that level your entire life going back to our retirement smile theory.

Stephanie McCullough (13:45)

So, this is kind of two points you’re saying. One is that a lot of these assumptions on straight line spending, spending every year, the same amount adjusted by inflation. A lot of those are too low. However, the second part of this is important and I think we want to spend a little time here, is that we are starting to disagree with that straight line spending because we’re getting closer to it, because we’re seeing our clients go through it, because we’re seeing our family members go through it.

Stephanie McCullough (14:13):

And just the real fact that there is that slowdown in spending kind of statistically, but here’s the other part, here’s the other part. And I’ll tell you, I was at a wedding this past weekend with some friends from graduate school and I was having a conversation with my friend, Tom (hi, Tom) and he literally unprompted (I did not plant any of these seeds) — but he was talking about this fabulous trip he and his wife, Arlene (hi Arlene) are taking starting in September through Northern Africa.

Stephanie McCullough (14:48):

They’re going to all these dream destinations. And he said they’re spending the money now because this is the time when they can take the camping trip in the desert and they can ride the camels, and they can do the long walking tours. And he’s not convinced in 10 years that they’ll be able to do this.

Stephanie McCullough (15:08):

They’re right on the cusp of 60, both of them, so maybe they’ll be healthy at 70 to do this. But he also said that, “Okay, in 10, 15 years, if I can’t take trips anymore, I’m going to be so happy I did this.” So, it’s almost this idea of kind of front end loading the fun stuff. What do you think about that?

Kevin Gaines (15:29):

Stephanie, that’s absolutely correct. I mean, if we think back to prior episode, when we had Steve on here, he was talking about retiring and spending time with his parents. He knew the clock was ticking on their life expectancy. He wanted to be able to enjoy trips with them while they could still do it.

Kevin Gaines (15:53):

Well, getting back to this whole planning thing, those are expenses he’s not going to have now. But he had them in the first couple years as they were trying to do all of these trips and these activities. Parents have slowed down, dad has passed as an update. But now his budgets look different or his spending requirement (I shouldn’t say budget) or spending desire is different.

Stephanie McCullough (16:20):

Right, exactly. So, I have another couple that I work with, they’re clients and they’ve been wanting … we’re talking about travel. It’s not always about travel, it’s whatever it is in your life that maybe costs more that it’s on the discretionary side. If we think about your spending in the essentials, you need food and shelter. You need food. You need probably a cell phone. Like some of those things versus the discretionary, the things that maybe make life more fun. But you could cut back if you needed to.

Kevin Gaines (16:53):

It’s just travel (and again, a lot of financial planners will do this) — travel is just an easy example to use of big-ticket item that you have discretion of when you do it and it’s also something you tend to do younger versus older. So, as a generic example, it checks a lot of the boxes to make a good example.

Stephanie McCullough (17:15):

But feel free to insert your own version of this stuff. So, this couple is not retired yet, but they had been wanting to take a big trip for them, it was Portugal. And they finally did, use that PTO they hadn’t been using, spend on that trip. Their kids are both now out of college, that expense is going down a little bit.

Stephanie McCullough (17:41):

Yes, some of us still subsidizing our kids. But okay, we don’t know what the future is going to hold but are you going to regret it if you never took the trip? Because nothing is guaranteed. And again, having lived through the pandemic, I think more of us have that mindset.

Stephanie McCullough (17:58):

I was in an airport a few weeks ago and I saw a T-shirt. I wish I had grabbed a picture of it. It said, “Die with memories, not dreams.” And okay, we’re not doing the YOLO thing, go too crazy, but at the same time, it’s almost the idea, Kevin, if we’re back to that chart of spending in retirement and looking at all the years between now and the end of your plan, meaning when you no longer need any money because you are under the ground.

Stephanie McCullough (18:27):

If we look at that chart, maybe the idea of borrowing today, some of the spending that otherwise would be allocated to the future. There’s a book that had a big impact on me, I read a few years ago. I don’t agree with everything in it, but it’s called Die with Zero, and he talks about memory dividends.

Stephanie McCullough (18:48):

So, what does that do? If you take the trip to Portugal and maybe in 15 years, you can’t afford a trip anymore, but you’ve got those memories and you’ve got the photos and maybe you’ve picked up a recipe that you’d like to make from that trip, would you rather have that and be a little bit more constrained in the future? I think what we’re trying to get at, Kevin, here is flexibility.

Kevin Gaines (19:14):

Yes. Look at it this way, we’re not Egyptian pharaohs, we don’t necessarily need to have billions upon billions of dollars to build and outfit inornate gold artifacts.

Stephanie McCullough (19:29):

A giant pyramid to take to the afterlife.

Kevin Gaines (19:32):

Yeah. A concept that I’m starting to use more and more, and some have accused of me as beating like a dead horse, is future spending. We call it savings. We call all the money we’re putting in IRAs and 401(k)s, we’re saving money. No, that’s future spending-

Stephanie McCullough (19:54):

You’re setting aside your future spending.

Kevin Gaines (19:56):

We put that money aside to spend. Yes, fine, some of that is put aside to give to the kids either during our lives or when we die, but that’s still spending the money, if you will. This money is built to be used.

Stephanie McCullough (20:10):

Right, not hoarded.

Kevin Gaines (20:11):

To use the old cliché, you can’t take it with you.

Stephanie McCullough (20:13):

Yeah, right. A little bit of that. So, another thing that I’ve seen work well, again, back to this idea of when we are asking the question, when the financial planner asks you, “Well, how much does life cost you?” Or when the calculator says, “Well, what are your expenses?”

Stephanie McCullough (20:28):

If we can think about, back to those essentials versus the discretionary, when I’ve seen financial projections and financial plans go really well is when the essentials category is a lower percentage of the total. If you could think about, maybe it’s the benefits of downsizing your home or not needing a fancy new car every year, those essential everyday monthly bills.

Stephanie McCullough (20:55):

And I don’t want to go to the extremes, but still the lower they are, the more space there is for the discretionary, for the fun stuff. So, maybe living in a smaller place in not the nicest neighborhood ever lets you go spend more time at the beach or the lake, or do the more expensive hobbies that make life fun knowing that if things start looking a little green around the gills or if inflation goes up, or if investment markets don’t do what we hope they do, you can cut back on the discretionary stuff.

Stephanie McCullough (21:30):

It’s harder to cut back the essentials. It’s harder to, on the spur of the moment, move houses because things have gone bad. Like those essentials, once you get them in place, it’s a little bit slower to make adjustments.

Kevin Gaines (21:45):

You have to eat. You have to pay taxes. You have to pay your utility bills. That’s stuff that’s month in, month out, never going to change. But to your point, Stephanie, if you think of that as one number versus, oh, what I can spend or what I want to spend or whatever, it also gives you almost a freedom to say, “Oh, I can spend more now because really at the end of the day, as long as I have X amount per month, I’m not going to end up homeless. I’m not going to freeze or melt in the summer or whatever.”

Stephanie McCullough (22:28):

Right. I won’t be living under a bridge eating cat food.

Kevin Gaines (22:31):

Exactly.

Stephanie McCullough (22:32):

The whole bag lady concept. So, the other pushback that we get and back to Kevin’s explanation of the retirement smile and how spending can go up in later years. Yes, some of that can be due to medical, but usually at that point in the US, you’re on Medicare and hopefully you’ve got a good Medicare supplemental program.

Stephanie McCullough (22:52):

So, it’s not necessarily doctor bills that are going to do you in, it might be the need for assistance with the activities of daily living, which is back to the concept of long-term care. And I know we’ve got an episode in there we can point back to.

Stephanie McCullough (23:06):

So, I’m not going to go into it in detail, but what if I need someone to help me come in and get out of bed and get showered, and help me move around my home and feed myself those kinds of basic things?

Stephanie McCullough (23:20):

That’s expensive. We know it’s expensive. And even if you’re part of a couple, okay, the default is one spouse takes care of the other spouse, but then usually, there is one spouse left remaining, and who steps in as default caregiver in that instance? Yes, you might need to pay for that. That can be expensive.

Stephanie McCullough (23:41):

So, again, if we’re looking at financial planning and covering risks, I mean, I think even just considering and looking at the various types of long-term care insurance (this is not an advertisement, this is not an endorsement) — but if that’s a risk that’s worrying you, look at insurance, look at the options, and maybe we can get one of our long-term care experts on here to go in a little bit more detail because there are things now that you don’t pay them every single year, they can’t increase the premiums on you.

Stephanie McCullough (24:08):

Like I’m not saying that that’s the be all end all, but if you don’t buy insurance, then the alternative is what they call self-insuring, which means, okay, I can pay for it out of my assets. And then you kind of got to as you’re going along aging, I got to have this pot of money over here that’s sacrosanct, I can’t spend because I might need it for care.

Kevin Gaines (24:31):

And Stephanie, bigger picture, that’s one of the problems with spending in retirement, is this nebulous, undefined, what if I need it in the future. So, all of us, I’m using me as an example, I definitely think of it this way, which is, I just said, this is all future spending, but it’s not all future discretionary spending in my mind because, oh my gosh, what if I get sick? Or, oh my gosh, what if there’s an emergency? There’s always this amount that we want to keep aside.

Stephanie McCullough (25:05):

What if you live to be 113, how long is this future we’re talking about?

Kevin Gaines (25:10):

Exactly, we may need it to go more than the 30 years the 4% rule says we can go.

Stephanie McCullough (25:16):

This is true. These are the details we get into and the risks. There are a lot of risks and unknowns. Back to this concept of the problem with conventional retirement projections and assumptions, this idea of the straight line, I’m going to spend the same amount every year, yes, adjusted by inflation.

Stephanie McCullough (25:37):

And I think we want to encourage you to maybe poke some holes in that, question that assumption. If you’ve been given a projection yourself, go back and look at it, “Like, wait, what is the spending assumption here?” And maybe I do want to front end load the fun stuff and know that, okay, that means I might have to make adjustments and maybe I’m okay with that.

Kevin Gaines (26:03):

And one more negative note for us to possibly end on, depends on how more long-winded I can be or not, Stephanie, is one of these assumptions with the straight-line method that we’re talking about, and a lot of the other calculations as well, is they assume nothing changes as far as our reaction to fill in the blank. So, again, we’ll use the 4% rule as an example-

Stephanie McCullough (26:29):

Fill in the blank being …?

Kevin Gaines (26:30):

Something bad. So, 4% rule says you do the 4% because if markets fall, we get really bad markets, you’re still spending at least this amount. It never asked the question, and frankly, it was because the computing power didn’t really exist back then for you to do this, but if the markets do fall, I can change my spending, which gets back to the whole idea that you were trying to make, that you made, Stephanie, which is the absolute needs that we have to spend on versus discretionary spending, we can adjust.

Kevin Gaines (27:06):

These calculations never really took that into account if the market falls, I’m going to take less out of my savings.

Stephanie McCullough (27:15):

Or if inflation is higher and gas prices go up, just hypothetically, maybe I go out to dinner a few less times a month, or I skip that trip to New York to see the plays this year, and I do it next year. We are humans, we adjust. We are resilient. We make changes. And again, mostly because of, as Kevin said, the computing power and the mathematical ability, the projections don’t think that way.

Kevin Gaines (27:44):

Yeah, like I said in the beginning, these things are great at math, they suck at flexibility.

Stephanie McCullough (27:50):

I want to go back to your language that you pointed out, it uses especially the financial planning software I have been using for 20 some years, talks about success versus failure, and I try to make the point to the people, it’s not failure. It’s not, you are homeless, you are destitute. It is, you have to make adjustments.

Stephanie McCullough (28:09):

Oh, oh, adjustments and there are some new softwares that tell you the magnitude or try to tell you, and sometimes the adjustments aren’t that big. So, chance of making adjustments, again, if you can build flexibility into your plan, if you can build flexibility into your life and how you spend and know ahead of time, kind of go through the fire drill in your mind, okay, if I had to cut back, I would cut back on these things — well, that doesn’t seem so, so terrible.

Kevin Gaines (28:37):

And I would end with this Stephanie, which is as you’re approaching retirement, start changing your mindset from thinking I can spend this per year to, oh, I’m going to be wanting to spend more in the beginning, knowing I’m going to spend less towards the end, and this is just a big pile of spending. All of this savings is a big pile of spending that I’m going to spend at some point, but I’d want to spend more of it in the beginning knowing I’m going to spend less of it in the end.

[Outro Playing]

Stephanie McCullough (29:10):

TLDR, plan that trip, people. We’ve hoped you had enjoyed this. We’ll talk to you next time. It’s goodbye from me.

Kevin Gaines (29:17):

And it’s goodbye from her.

Stephanie McCullough (29:28):

Be sure to subscribe to the show and please share it with your friends. Show notes and more information available at takebackretirement.com. Huge thanks for the original music by the one and only Raymond Loewy through New Math in New York. See you next time.

Voiceover (29:35):

Investment advice offered through Private Advisor Group, LLC, a registered investment advisor, Private Advisor Group, American Financial Management Group and Sofia Financial are separate entities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security.

Voiceover (29:56):

To determine which investments may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be a substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.