The 5 Years Before You Retire: Retirement Planning When You Need It the Most | Chapter 3: Income in Retirement - Part 3
If we had the following, we could create a spreadsheet and tell you exactly how much you could spend each year in retirement.
The current value of all your assets
How the value of each asset will change year by year
How much cash will be wanted/needed each year
We can get reasonably close to #1. So far so good. #2 includes not only your investments, but also your real estate and any other item that shows up on your balance sheet. We’ve misplaced our crystal ball, so unless you have yours, there’s no way to try to figure this out.
#3 has very much packed into it: your current expenses, how you will want them to change over time (such as keeping up with inflation - meaning we’d have to know what inflation will be), when you will want to take any extra trips and how much they will each cost, when your car or appliances will break down and need replacing, when you have a medical emergency with large bills, if you will eventually want to downsize or buy a second home, how long you will live (when you’d like to spend your last dollars), what you would like to fund after your life if anything, if other income sources change such as Social Security, if taxes increase and thus increase the need for cash, and on and on.
So what are we to do? How do we answer the question “How much can I spend?”
We take our best guess at what it is you actually want (and why)
We make an income plan that supports this and includes guidelines for how we will change when life does
We test this plan rigorously against history and possible future projections to identity its strengths and weaknesses
For example, if you want
To never run out of money
To retire at 65 debt free
To maintain total household income of $10,000/month
To fund your daughter’s wedding and gift toward her first down payment
To buy a $100,000 RV and travel the country
To give generously to your charities of choice
To leave $250,000 to each of your children
We’ll build all of these into our financial planning software along with your complete balance sheet (assets and liabilities) and income statement (current and future income, current expenses). We then use historical data and future possible projections (changes to markets, inflation, taxes, your longevity, etc.) and ask, if you went into retirement at hundreds or thousands of previous entry points with all the same financials and goals, how well would things have worked out for you? If you would have run out of money 80% of the time in the past, we’d have to change some of the goals above. Maybe it’s lowering monthly spending, forgoing the RV, or instead deciding that the kids get whatever is left over, if anything.
This is akin to setting sail on a ship with a specific destination in mind. At this point, all we have is the map. What we don’t have is knowledge of how current will change, or which storms will hit and when. If it was your first time sailing across the Atlantic, you would want more than a detailed map and pat on the back. You would want someone on board with you that knows how the plans need to change with the weather, if you find another destination along the way, etc. This is why we only work with clients in an ongoing capacity.
Each quarter, we check into your plans and ensure that you’re still on track. If there are items that need to be discussed, we put those on our list to discuss at your semi-annual meeting. If there are any major red flags that have appeared since our last review, we get in touch sooner.
As this relates to Birken’s book, we do not pick a percentage to withdraw from your portfolio and hope it works. And while we will review what annuities will help achieve your income goals, we do not use annuities as the solution.
So in sum, how do we determine how much you can spend in retirement?
We make a map of the best course with the very limited information we have at the time.
We know how and when we will change course
We stay with you the entire way monitoring the horizon and keeping track of your financials so that you can focus on what’s most important to you
Let us know
Throughout your life, how often has what you wanted changed? Where you live, who you spend time with, what activities you spend your time doing?
Would how much you spend (and how you feel about spending) change if your income was guaranteed by an insurance company?
Until next time, happy reading!
