Jacob: Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host as always. Today on the show, we're going to be talking about what might be the hardest part of retirement for most retirees. And this isn't necessarily what I think is the hardest part.
This is what I hear from my clients and people just like you who are thinking about retirement or already in retirement. So we're going talk about what that is and some of the reasons for this particular thing being the hardest part and then also how you can overcome it. Now, before we jump into the content of today's episode, I wanted to share with you the fact that I'm going to be adding a new segment to the podcast here in the coming weeks, but I'm gonna need your help. So what I need from you is I need you to send me your questions about retirement, whatever's on your mind, whatever you're wondering about, whatever might be about your situation, how you should do something or what you should think about, I need you to send those to me so that I can create this new segment of the podcast called the Friday Q and A, where I answer your specific listener questions. So what you can do is this if you have questions and you want them to be featured here on the show to get them answered as best as I possibly can.
What you can do is go to rivertreewealth.com/questions and that's where you will have a little form that pops up and it asks you what your name is your email that way I can respond to you. But then also, you can submit your question and that is it. And so you can tune into the coming weeks and you'll be able to see what I have to say about your question and maybe some things to think about. So I wanted to put that on your radar and let you know that I need your help. This segment's not going to happen unless you send in your questions and help me out in terms of getting the content prepared for that.
So if you would, after listening to this, if you have questions, send them in and I look forward to hearing what those might be and see what we can do to help improve the content here on the show so that you can benefit more from it. All right, with that out of the way, let's go ahead and jump into what the hardest part of retirement might be for the majority of retirees. So what is it? Well, what I've seen and what I hear from people just like you is that spending is going to be the hardest part of retirement. And there's plenty of reasons for this, we're about to go through a few of them, but I want you to think about this.
You you worked your entire career, you've worked hard, you've saved, you invested, you've done all the things that you were told to do and you knew were right to do, And now you finally made it. You've reached this point of retirement and you can go to all the fun stuff that you've dreamed of. You've got discretion of your time. You've got the ability to be kind of anywhere you want to be in the world. You've got family and hobbies, but you've got this really uneasy feeling and you realize that you're scared to spend your savings, right?
You've worked hard, you've done all that, you've saved, you've invested, you've done all the right things to get to this point to be able to go enjoy, But deep down, it's really tough for you to say, I've got a million or 2,000,000 or $3,000,000. I'm ready to go spend all that money over the rest of my life. That's the hard part. So everything you've worked hard for, it's right here in front of you, but it's hard to do. In fact, I've got a client who's got over $4,000,000 and they come to me every time they say, Jacob, I need to buy this thing.
It's like $3,000 Can I buy it? Like, am I am I okay to do that? And mind you, they don't spend $20,000 a month. So they are fairly frugal overall and they don't spend near as much as they otherwise could. So my job in their scenario is to actually encourage them to spend and say, yes, please go spend that and actually spend more and leave a tip when you do, right?
Because at the end of the day, you know, we've talked about their goals, we've talked about what's important to them. And guess what was not in the top five of their list of things that were most important, leaving 4 plus million dollars to friends, family or heirs in the future. That was not the most important thing to them. The most important thing to them was to spend time with family and to enjoy life while they have it. And that's what their money can help them do, but they need a little bit of nudge every now and then to help them be confident enough to go spend even though they have well more than they ever will need.
So that's a common thing to be quite honest with you. There's a lot of folks who have been frugal and lived their whole lives saving and doing the right things. And now they get to this point, they can't get themselves to spend because of this fear, this worry. So what are some of the reasons for this? Like what causes people to feel this way?
And so I've got a few things written down here that I want to share with you. But the biggest fear that just kind of is on every retiree's mind is running out of money. You know, what if I run out of money? I don't want to be left destitute on the side of the road at age 85 whenever I'm trying to, you know, live out the last years of my life. I don't want to have any money because I spent too much early on.
And so that's something that's on everyone's mind. But one of the problems with retirement planning in general is that most people assume or plan out their expenses very far off. They're very incorrect on how their spending is going to go because most of the time, every planning software default anyway, is going to be built around an inflation adjusted spending estimate. So if you have a $100,000 a year that you spend right now today, well by age 85 or 90, that could be upwards of $300,000 a year being spent. And my question to you is this, would you be spending $300,000 on your lifestyle whenever you're age 90?
Ninety 9% of the time, the answer is no. That's not really a hard question because your health, just your energy, your ability to go do things and spend money, it's not really there anymore for most people, right? And so in that situation, the spending estimate of the software or the planning projection and whatever you're using is way off. And so what I've found and seen with my clients is that most people end up spending more in the first ten years of retirement and it slowly and gradually goes down after that because their health might not allow it anymore or they just don't have the desire to go anymore. They might have the energy and they just want to enjoy life close to where they are.
No need to travel extravagantly across the world anymore. So this fear of running out is obviously common and it's one of the biggest fears for retirees, but I often find that is unfounded in terms of the actual math. And most people can actually spend way more early on retirement and they should spend more early on in retirement, even though most people end up not spending enough because of this fear of running out. So there's a balancing act for sure here. You've got to manage your spending in terms of a total distribution rate from your portfolio, But I would not be afraid of spending a higher distribution rate for a little bit of time here to enjoy life.
And then especially if markets are doing well, and you're also not taking money out of your portfolio while the market is down or your portfolio has declined in a large amount. So that's the first thing. The second thing is, is this psychological habit of saving and investing is really hard to break. Okay, so for decades, you've been trained to save and invest, right? That mindset that it just doesn't switch off overnight.
Many retirees, it's really hard psychologically and mentally to go from accumulating wealth to actually de cumulating because in some sense, is that you're signing up to spend down or de cumulate your nest egg. And that's a really big mental hurdle to get over. You've been hardwired for twenty, thirty, forty years to save and invest and just magically flipping a switch, you know, mentally and snapping your fingers and saying, I'm done doing that, I'm gonna start doing this other thing, actually the opposite now. That's not very easy to do. And just because you're excited about retirement doesn't mean that the mental shift there is going to be easy.
So think about that for yourself. Are you someone who really enjoys seeing your investments in your wealth overall go higher and higher and higher? Because if you do, that's not a bad thing inherently. But what you can find here is as you enter retirement, you start to see your portfolio and your wealth, your total net worth number go down a little bit. What is that going to do to you emotionally?
What is that going to do to you mentally? You know, I think about that and start to evaluate that for yourself and say, hey, am I someone who's risk or prone to this, this kind of a, you know, hardwired, you know, saving mindset that I've been used to for so long? Now, a few of the things here are going to be uncertainty about the future. You know, I don't know how long I'm going to live. What are my unexpected expenses that might arise or how's inflation going to affect my purchasing power?
The uncertainty of just everything makes people hesitant to spend freely. They wanna prepare for the unknown and almost make it certain. And here's the unfortunate truth is that nothing in this life is certain and especially around money and especially around investments. Obviously, we have history and data to go on, but doesn't mean that tomorrow is gonna be the same as what happened yesterday. So uncertainty around the future holds a lot of people back, you know, healthcare, long term care costs, and hey, I don't know how much that might be one day.
So I need to have a big reserves, you know, built up for that, you know, market volatility. What happens if I retire, you know, tomorrow and the market goes down, you know, 30% over the next year, what am I going to do? Just kind of the fear around economic, you know, concerns and big market downturns and hey, what if I spend too much now and I don't have enough later because of, you know, I'm spending too much at the wrong times. And some retirees actually feel guilty about spending money specifically on themselves, especially if they want to leave an inheritance to their children one day and support charitable causes. They worry about spending today and what that means in terms of taking away from future generations.
So that's another thought on some people's minds. But here's one of the biggest reasons for this fear around spending. It's a lack of a clear withdrawal strategy. You know, there's so many different ways to think about how to take money from your accounts and how much is safe and how much, you know, can you take and what does your retirement spending and expenses really look like? You know, the 4% rule something you've heard of probably in this different, know, strategies, but most retirees in general don't have a clear plan around how or when to withdraw their savings, and that's gonna lead to hesitation.
And so without a structured approach or, you know, a guardrail strategy or a bucket strategy, which you've heard me talk about a bunch, the default typically is going to be to underspend just to be safe, right? We wanna be safe, and so we underspend how much we otherwise could because there's just really not a clear strategy in place. And so having a plan in general is actually gonna give you the freedom to go spend more. It's kinda like, I don't know if you heard of put it this way before, but a budget, right? No one likes that.
No one likes the B word. No one likes a budget because they don't wanna feel constrained. But if you've ever been on a budget and you have done it for an extended period of time, what you find is, is whenever you do have one in place and you know what you're spending your money on and how much you can spend in every different area within that budget, it actually frees you up to go spend however much, you know, on the extra portion there, the leftover, the discretionary part, you can go buy whatever you want with that. So let's say your budget's $10,000 a month and 3,000 of that 10 is kind of a discretionary spending, well that 3,000 can be used on whatever you want to use it on if that's the discretionary bucket. The other 7 though, we know that that's going to be allocated towards the normal things that we have to have month to month.
So a budget actually is freeing in some sense, it restricts you so that you can be free. The same thing here can be said about a retirement withdrawal strategy. You have to know what your numbers are so that you're actually restricted in such a way to say, here are the boundaries, here are the guidelines. And then within that range, you're good to go spend on whatever you feel necessary. So, I would think about it that way, but having a really clear withdrawal strategy and a plan for this is going to be the difference maker in most scenarios.
And the final thing I'll say here around spending and retirement, why that might be really hard for a lot of folks is something called the endowment effect. It's this mental kind of psychological barrier or behavioral thing where, you know, we've got, let's say a million dollars, the endowment effect says, hey, whenever I have $1,100,000 I can spend that 100, but I can't spend down below a million. So we want to only spend the gains, we never want to spend what we started retirement with, so that we quote, never run out or never spend down our principal or what we started retirement with. So the endowment effect says we can only spend the gains, And that's even, that's not necessarily true from a mathematical perspective in terms of never running out of money, but it's a mental hurdle. It's a mental block that a lot of people end up with.
So people tend to value what they have more than they otherwise should making it really hard to part way with their assets. So the idea of, you know, seeing a portfolio balance go down can feel really painful, even when spending is necessary and planned. So the key for you as a retirees to kind of strike a balance here. You've got to have a plan that ensures financial security while allowing you to go enjoy the fruits of your labor and kind of what you've worked your entire career for. So if you've got some of these things on your mind, this fear or anxiety around running out of money in retirement and kind of worry about spending too much, it's probably an indication that you don't have a detailed retirement plan and specifically your retirement spending plan.
Because if you have that in place, you're gonna be confident. I believe in this so much that that's why I do this job is I believe that confidence comes from clarity and clarity only comes from in-depth planning. So if you have this plan that defines how much you can spend and when you kind of get into a danger zone and when you need to spend more, that's going to give you confidence and your plan should be able to answer questions like, how do I make sure my money outlast me? Basically, how do I not run out? Is a Roth conversion right for me?
How can I minimize my taxes that I'm gonna pay throughout my life? What's the best strategy to withdraw from my savings? How should I integrate social security into my plan? These types of questions, they're on your mind already, right? But that's what your plan should be answering.
That's what your plan should be defining and outlining for you, so that you are confident in it, and then you can go and spend however much you are allowed to spend from your portfolio and feel really good about it. So here's my suggestion for you. Whenever you're thinking about this, I want you to do two things. Number one, I want you to get out a piece of paper, and I want you to list out what is most important to you. Okay, this could be things like travel, it could be time with family, it could be a vacation every other week, it could be giving to a church or charity, either financially or with your time, it could be saving for kids education, it could be paying for the entire family's vacation every single year.
Like what are the most important things to you specifically in your life? It's gonna be different for every person. But I want you to write down the five most important things. Okay? And the second thing I need you to do is create a spending plan that allows you to do those things.
So based on your current savings and assets and your portfolio that you've got saved and how much income you might have from sources like social security or a pension or something like that, how can you make the most of your wealth? How can you make the most of what you have? And how can you use it to live a fulfilling life and fulfilling retirement? So the first part of this, you're writing down the things that would actually fulfill you. The second part of this is building a spending plan that allows you to do that.
So what this is gonna do is it's gonna give you confidence, it's gonna give you clarity, it's gonna give you the freedom to go and do these things. I see far too many people, you know, get later into the years of retirement and wish they'd spent more earlier and enjoyed more earlier on in life. Instead, they worried for the first five to ten years of retirement, always thinking they'd run out of money because they didn't have a plan which led to those fears and those worries. And that's what I don't want to happen for you. So I encourage you to go through this little exercise yourself, write down those important things to you, create a spending plan for it in terms of how much that might cost you.
And then back into your overall savings in your nest egg that you've got built up and see, hey, is this gonna work? Is this doable? Is this something that's possible? And then what you'll find there is once you find out the answer to that, if the answer is yes, you're gonna feel confident, you're gonna feel relieved, you're gonna feel like you have the ability to go and do those things without worry. And so if that's something that you need help with, as a retirement planner help people do this every day.
And so I'm more than happy to have a conversation with you just to see if there is an opportunity to to help you or work together in any capacity. And if not, totally fine. But I do want to make that available to you if you feel led to, and you do want to help with that. That's my encouragement to you. I hope you can avoid this common regret.
Feel free in your spending so that you can go enjoy life for what it's meant to be for, which is go and live rather than just store up a bunch of money that will never be used. So hope this helps as you continue to build out your plan and get confident around it. Remember, if you want to have your question featured here on the show, then please go to rivertreewealth.com/questions. And that's where you can submit that question. And that will be linked down in the description of this episode as well for you if you need to go find it.
Thanks so much. And I hope you have a great rest of your 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.