Jacob: Hey, friends, and welcome back to this week's Friday Q and A. Thanks for so much for tuning in. I hope that you are having a wonderful week as we head into the weekend here. Again, if you're new to the show and you're wondering what this is, the Friday Q and A and Jacob, what's Retirement Answers? I'm a first time listener, just finding the show.
Well, I'm glad to have you first of all. And second of all, if you're wondering how you can submit a question to have it answered here on the next Friday Q and A or one in the future on a future Friday Q and A, then you can use the link down in the description that says submit my question. It helps me continue this segment. I can't do this without you. So I much appreciate your questions.
And it really gives me some insight into some topics and things that are on your minds as someone who's either retired or about to retire and some of the questions that are there that I can make this a more helpful podcast. So with that, let's go ahead and jump into this week's question. It comes in from Carolina and it says, am 60 and I'm retiring in a few months and my husband is 65 and he's already retired. I'm tracking our monthly expenses and they're about $14,000 per month, but expect to have travel in our Go Go years that will be in addition to this. But how much should we raise that monthly amount to account for these extra travels during our Go Go years?
So Carolina, wonderful question. This is something that every retiree dreams of, right? You've got your base monthly spending and you want to be able to enjoy and go during the go go years. So how do I think about spending for the extras, for all the travel and for some folks, maybe it's not travel, you can fill in the blank with whatever the extra thing is that you like to do and spend money on early on in retirement. The first question I have whenever you say this is, what is your normal spending in terms of how comfortable of a number it is?
Is that 14,000 a month? Is that pushing it in terms of what your portfolio will allow or is it a really comfortable number? Do you have $5,000,000 and 14,000 a month really not a big deal? That's less than a 4%, you know, distribution rate or do you have $2,000,000 and you're trying to spend 14,000 a month? That's a little bit tighter of a situation.
So that's the first question is how comfortable of a monthly spending number do you already have? The other question here is how much of that $14,000 is being met with fixed income sources that you might already have started? So maybe think about a pension or VA disability or social security disability. What are the things that are filling up that $14,000 per month, especially if your husband's already retired and he's 65, you know, is his social security turned on yet or not? What is your plan for social security?
You know, you're 60, so you're not quite to social security age, but you are retiring here in a couple of months. Think about how much as a percentage of this $14,000 is going to be met by fixed income sources, meaning you're not pulling that amount from your portfolio. So maybe 60% of the 14,000 is met by a pension and other sources, and then the other 40% that's going to be met by your portfolio distribution. So that's the next question is how much of a secure fixed income source as a percentage of the 14,000 you need every month, how much is that being made up by those income sources? Those are the first two questions you probably need to ask yourself.
Now, the next thing that we need to look at here is what type of travel are we thinking? Are we going overseas for two months at a time? Are we going, you know, down the road an hour to the casino? Like, are we going RVing? What are we doing?
Are we doing multiple trips a year? Are we doing one big trip a year? Are we paying for all the family to go on a vacation with us? Like, what are we thinking there? Because that's gonna play a big role in terms of how much it actually costs.
Cause if you like to RV and go camping, well, that one time purchase of whatever rig or, you know, thing that you're trying to buy to get where you're going, that's a one time deal, but the cost after that are really, you know, insurance, maintenance, fuel and a campground fee. So it's not extravagant at that point up on the front end, it might be, but it's that's different from staying in Europe for two months at a time at nice hotels, right? So it depends on the type of travel that you're looking at. So that's something else to consider. And when it comes to actually budgeting for your travel during your go go years, would say price out your current costs, price out what you expect to pay and then add another 20% to that because we all know that we spend over budget when we go do fun stuff.
We don't wanna have this tight budget when we're on vacation. So don't think, hey, I'm going to spend $10,000 on this trip, and you've got to stick to that, but this opportunity, this fun thing comes up and adventure or whatever it is, and you're like, hey, it's gonna be another thousand dollars, but I have a $10,000 budget. Just book in the back of your mind and plan for an extra 20% overage on all of your travels and whatever it is, so that you have a little bit of wiggle room there and a little bit of margin. So I would say that you need to think through all these questions first. Fixed income sources as a percentage of how much money you need every month, how much you actually pulling as a distribution rate from your portfolio.
I want to talk about this here in just a second again on the distribution rate, but then you can map this out with some sort of projection software. Obviously, I use that with my clients, there are plenty of public options out there for you as well to see like, hey, if I did this or if I spent, you know, 5 more thousand a month on top of the 14,000, what does that look like? And what if I only spend 2,000? Is that better or worse? Or what about 10,000 more on top of the 14,000?
What are my outcomes if I do that? That's gonna be a really good tool for you as you plan out how much you can spend on average per year on your travel expenses. So I wanna go back to this distribution rate thing, because here's something that a lot of people I think get wrong. They look at a distribution rate and they say, well, the 4% rule. So I can take 4% of my portfolio every year based on whatever the starting amount was whenever I start a retirement and go from there moving forward.
And that's fine, it's not a terrible thing. I just don't like doing it that way. Because let's say, know, Carolina, need $14,000 a month, let's add another 3,000 a month for travel. So $17,000 a month, you've got $3.04 or $5,000,000, whatever the amount is, and you're not yet turned on social security, but both of your social securities would be a total of $6,000 every single month once you do get those turned on, let's just say 3,000 each hypothetically here. Well, once you turn that on your distribution rate from your portfolio is gonna go down, right?
Which means your distribution rate early on before social security or a pension or anything else turns on, you're gonna have a higher distribution rate from your portfolio. So in that situation, a following the 4% rule means if you started with a 4% distribution rate to give you your 14 or $17,000 a month, kind of using your example here, that means you need a lot of money, right? And then what happens here as soon as you turn your social security or other, you know, fixed sources of income on your distribution rate that goes to three or two and a half percent, whatever it comes out to. And so now you have way more money in your portfolio than you ever needed. So the point in saying all this is expect a higher distribution rate during your go go years and expect the distribution rate to go down over time, number one, as other fixed income sources turn on such as social security and pensions.
But then also as you age, you're likely not going to be doing as many things nor spending as much money on these extracurricular activities as you get older. So expect to spend the most in these first five to ten, fifteen years, depending on your age and your health, and that's gonna trickle down and go lower over time as an overall spending numbers. So think of your distribution rate not as something that should be set in stone, but you should be evaluating that thoughtfully over shorter periods of time. So think to yourself, I can have a six or 7% distribution rate these first five years of retirement, knowing that it will be a three and a half percent distribution rate from that point forward, once Social Security or once some sort of income source turns on. So you can withstand a higher distribution rate from your portfolio with the understanding again, planning ahead that you've got other things coming in the future.
Now, here's what I will say, you need to have the ability and the cushion to pull back on your discretionary spending if you have to. So think of this as like a dynamic approach where you can scale up your spending or down your spending based on how your portfolio is performing, how markets are moving, and when things are going really well, you can spend more money or if things are going poorly, you probably don't want to spend as much that particular month or quarter or year. So plan out your travel expenses, but be willing to delay or cut back during bad market cycles or poor portfolio performance times. So to wrap it up and summarize this, I would say you've got to know what type of travel you're really looking to do, price it out at a little bit of overage on that so you have some cushion. And then really the kicker here for me is going to be how comfortable is that 14,000 a month?
How comfortable of a spending number is that relative to your portfolio and relative to how much other income you're going to have coming from different places? If that's a tight number, you probably can't spend an extra 5,000 a month on travel, on average across the full year. You might get to spend another thousand or maybe 2,000, just depends. Again, you'd have to evaluate this yourself, maybe use some software to do it. But having the ability to spend more or spend less using that dynamic approach is going to be crucial and giving yourself a little margin along the way, so that you don't back yourself into a corner of spending too much and not having enough for the rest of your life to meet your basic needs, but also the risk of not spending enough because you're scared to spend and you don't have a true plan for it.
So, Carolina, I hope this is helpful. I hope this gives you some ideas and some things to think about. And I really do appreciate the question because a lot of retirees I feel like can benefit from some of the thoughts here. Alright, thanks so much for tuning into this week's Friday q and a. We'll talk to you again next week.
Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.