Help Me Retire Podcast - Episode 26

Are you spending enough in retirement?

Show notes:

Most of what you hear about retirement planning focuses on making sure you don’t run out of money...

But many retirees have the opposite problem... they don’t spend enough...

It might seem like a nice problem to have... but it’s still a problem... and I’ve got some ideas to solve it in this episode of the Help Me Retire podcast...

This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…

Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…

He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…

And now… here’s Mike…

We see it in study after study... J.P. Morgan... BlackRock... the Employee Benefit Research Institute... today’s retirees are consistently underspending... even when they have more than enough assets to live comfortably...

Why is that? Why is it so hard to give yourself permission to enjoy what you’ve worked so hard to build?

Let’s start with the psychology behind this decision...

The number one reason retirees underspend... is they’re afraid... afraid of running out of money...

And that fear... for many people... never goes away... even after decades of saving and investing...

We think... What if something happens next year? What if the market drops? What if I live to 100?

And rather than using the money they’ve saved... to improve the quality of their lives... a lot of people just hold back...

Their fear... is completely understandable...

But fear can also rob you of the very experiences your savings were meant to pay for...

The second reason many people underspend in retirement... is habit...

For 30 or 40 years... your financial muscle-memory has been trained to save money...

Every raise... every bonus... every windfall... you tried to save some or all of it... and that’s how you got all this money... and again... it’s a nice problem to have...

But overnight... when you retire... you go from being a saver... to a spender...

And that’s not a small shift in your thinking... it’s like re-wiring your financial DNA... and that’s really hard for some people to get used to...

Another psychological challenge... is called framing... how our brains interpret where all this money comes from...

During your working years... your income came from a paycheck... which felt safe and predictable...

In retirement... withdrawing from the money you’ve saved... can feel like depletion... even though it doesn’t have to be... and we’ll talk more about that in a few minutes...

But it’s really the same thing...

Your paycheck used to come from your employer... now it just comes from you...

Behavioral finance calls this the “framing effect”... and it’s one of the biggest psychological barriers retirees face...

And finally... some retirees hold back on their spending... because they want to leave something behind for their children or grandchildren...

What a nice idea... but sometimes it goes too far... some people start to feel guilty about spending their own money...

Others simply maintain the same frugal habits they built decades ago...

The result? They spend less than what’s possible... even when they can afford to spend more... and all too often... the wind up missing the best years of retirement... the so-called “go-go years”... when health and energy are highest...

So that’s why retirees underspend... fear... habits... framing... and the natural pull toward security...

The question is... how do you overcome that? How do you give yourself permission... the confidence... to actually use your money for the purpose you saved it for... to live well in retirement?

I’ve got some ideas for you... in just a second...

The key to spending comfortably in retirement... isn’t about learning to be reckless...

It’s about... reframing... how you see your money...

Instead of focusing on what might go wrong... we help our clients focus on what’s already working for them... the income their investments are producing... and the structure that is designed to keep that income increasing over time...

So the first thing I’d recommend... is to anchor your thinking around... the income your investments are generating...

At Brown Family Wealth Advisors... we design portfolios built around a rising stream of dividend income...

We want to own shares of high-quality companies... that have a history of increasing their dividends... year after year...

That cash flow matters... It’s tangible... measurable... spendable...

And it gives our clients the same sense of stability they used to get from a paycheck...

Now... when you realize that your dividends are potentially enough to cover your living expenses... and that those dividends could be rising faster than your cost of living... faster than inflation over time... well... that changes everything...

You stop thinking in terms of selling shares to pay the bills... and start thinking in terms of living off the income your capital produces...

That simple shift in mindset... can do wonders for your confidence...

Now... let’s talk about the most powerful tool we use to help you reinforce that confidence... something we call... The Reserve...

This is something I first wrote about in my book... Your Way to True Wealth...

The Reserve is a goals-based buffer... built right into your retirement plan...

This buffer holds five to ten years’ worth of your planned withdrawals...

And the Reserve isn’t invested aggressively... just the opposite...

We use high-quality... shorter-maturity... fixed-income investments...

Why do we invest the Reserve so conservatively? Because when it comes to the money you plan to live on for the next five to ten years... the last thing you want to worry about is what happens to it during the next market downturn...

Equities... stocks... have historically provided some really nice returns... as long as we give them enough time to recover from those downturns... and having an ample Reserve... buys us that time...

If the market dips... or a big expense comes up that’s more than the dividends you’re receiving... you have the option of dipping into the Reserve... instead of selling long-term growth investments at an inopportune time...

It’s a cushion... a cushion that gives your stocks time to recover... and your income stream time to catch up...

The Reserve is both a psychological comfort... and a practical safeguard...

It’s there to remind you... even if markets wobble... your spending is thoughtfully positioned for years to come...

And that... more than anything... will give you more freedom and confidence to enjoy your life...

So, before we move on... consider doing these two things...

Start thinking in terms of the income your investments are producing... instead of feeling like you’re depleting your life’s savings with each withdrawal...

And two... start building your Reserve... that buffer in your portfolio that makes spending feel more comfortable...

That will turn uncertainty into structure... and structure into confidence...

Next... let’s talk about what that looks like in everyday life...

Understanding how people think... human psychology... is one thing...

Applying it to everyday life is where the real change happens...

Let me give you an example... about some people who had some real concerns...

They also had a nice nest egg... around two-and-a-half million dollars...

The portfolio we created for them... was already generating more than enough in dividends to cover their basic spending needs... but they couldn’t bring themselves to spend more...

They were living pretty frugally, considering... on about 50-thousand dollars a year... when they could have easily been spending twice that amount...

They wanted to travel... maybe do something for their grandkids... but the fear of... running out... depleting their nest egg... kept holding them back...

Once we walked through the numbers... showing how their rising stream of dividends more than covered the basics... and how their Reserve was enough to give them nearly a decade of backup income... you could start to see a change in their expressions...

They could finally see... in black and white... that they were okay... and likely to stay that way...

Next thing we heard... they took a vacation with their family...

Then, they booked a long-overdue trip overseas... to places they’d never been to before...

And now they’re getting ready for a two-week ocean cruise...

The money didn’t change... their confidence did...

That’s the essence of this whole conversation... moving from anxiety to clarity...

When you understand they structure of your plan... your income sources... your rising cash flow... your Reserve... that’s when you begin to trust the system you’ve built...

Spending stops feeling like risk... and starts feeling like reward...

And that’s what we mean by... True Wealth...

It’s not about when you retire... or whether your stocks beat the S&P 500...

True Wealth simply means getting to the point where you no longer have to work for money...

It’s when your investment income... added to Social Security and possibly pensions... is more than you need to live on...

It’s when you’re able to stop working for money... because your money is already working even harder... for you...

True Wealth isn’t about having a lot of money... it’s about having enough...

And it’s about having choices... the freedom to live the way you want to live... without worrying about money all the time...

You’ve already done the hard part... saving... investing... planning...

Now it’s time to let that money... that plan... start working for you...

What did we learn today?

Retirees often underspend... because of fear... habit... and uncertainty...

You can overcome those things... by reframing your mindset...

Move away from phrases like... depletion... spending guilt... market volatility...

And start thinking in terms of income... structure... and the confidence of having money in Reserve...

Rising income... the clarity that comes from planning... the confidence that comes from having a buffer...

Those things make up the foundation for spending what you can afford to spend...

Retirement isn’t about hiding in the house all day and clipping coupons... it’s about more than trying to protect your wealth...

It’s about using the money you’ve saved... to create a life you love...

Thanks for joining me today on Help Me Retire...

If this episode helped you see your money in a new light... share it with a friend or family member...

Remember... your money is a powerful tool...

Use it well... and use it joyfully...

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Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.  Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Past performance is not indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Dividends are not guaranteed and must be authorized by the company’s board of directors. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. This case study is for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.