Whatever you earn in retirement probably won’t be enough to cover your expenses as you wait to start collecting benefits.
Today, Jeremy Keil takes an in-depth look at how to make up the difference between retirement expenses and the start of your pension and Social Security. This is a highly practical episode that will help you piece together your retirement puzzle.
In this episode, you’ll learn:
What to consider when determining how much to set aside for the short term
Why it’s problematic to rely on investment income to fill this gap
How to determine what your spending will look like in retirement
What to take into account when considering what your retirement income will be
How to determine the amount of risk you are willing to take
Tune in to learn how to fill the gap between what you’re making and spending in retirement.
The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.
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Retirement Revealed Episode 6: Closing Your Retirement Spending & Savings Gap
Are you ready to uncover your retirement solution? Learn more as Jeremy Keil and his guests guide you along the path of retirement and reveal the five steps you need to take to solve your retirement puzzle. Now onto the show!
Aric Johnson: Hello and welcome to Retirement Revealed with Jeremy Keil. Today we're going to hit part three of a five part series, and part three is called need. If you haven't heard the first two parts, I'm going to ask Jeremy to review all five pieces of this that we're going to be covering in a five part series of podcasts. We took a break last time, and it was very important to do so because Jeremy talked about social security and it was fantastic, but now we're getting back on track with these five pieces. Good morning, Jeremy. How are you?
Jeremy Keil: Doing well, Aric. How are you doing?
Aric Johnson: I'm doing great. I know this is a five part series. I know that this is part three, but I don't remember all five. Can you remind us what all five parts are?
Jeremy Keil: Sure. You should go to our website, keilfp.com, and find all five of those, so that would be a good place to start for everybody. What we like to do is help you get ready for retirement, and we think this is so important that we've developed a process over the years on how you can make decisions in a certain sequence of orders so that you will make the absolute best decisions for your retirement. The first part is spending. Instead of focusing on your investments and things like that, you ought to focus on how much you're going to spend in retirement. The next step is looking at how much you’re going to make in retirement. Just because you stopped working doesn't mean you stop making money in retirement. You have things like pensions, annuities, and social security. There's different things that might come into play there. This one right here is the third one. This is talking about what do you need, which is what do you need to make up that gap between what you're spending and what you're making. Chances are whatever you're making is not going to be enough, so you need to make up that gap somehow. The future ones we'll talk about is how much do you want in your future, talking about your future money, and then what do you leave behind? That's the fifth step there. So we're on step number three, figuring out what you need in order to make up that gap between what you’re spending and what you're making in retirement.
Aric Johnson: Hmm. So is there normally a gap?
Jeremy Keil: We see that most of the time. That's the whole reason that people are saving in their 401k and outside of those areas. It's not like the good old days where you worked a nice job, you retired early, you got a nice pension, and all you needed was your pension and maybe the interest off your bank account money. That just doesn't seem to work out anymore.
Aric Johnson: No. The 40 years and the gold watch just doesn't happen anymore. I mean, not normally.
Jeremy Keil: Exactly. Even then you might be married, and you might have two different times that you're retiring. You might've gone through in the last step and decided that even though you'll get enough from your social security or your pension, you’ll wait a few years so that you get more later on. We don't think that you should wait for your social security and pension and then live in the poor house for those two, three, or four years that you're waiting. We think you need some money, so this is that difference. Perhaps this gap is only a short term, temporary thing until later on when your pension and social security shows up.
Aric Johnson: Yeah, that's a really good point because you've said on the last podcast that you can delay taking social security for a couple of years and that you actually make more each month that you delay taking your social security. So the longer you wait, the more money you make. I didn’t mean to rhyme that, but it was kind of natural.
Jeremy Keil: Yeah. That could be the right thing for you. A lot of people say, oh, I need to take my social security. I need to take my pension. No, you need the income, and it may be better for you to wait. When you need the income, it's got to come from somewhere, and this is what we're talking about: what do you need to make up that difference for however long that might be?
Aric Johnson: All right. I'm excited to get into this. Let's figure out how to fill the gap.
Jeremy Keil: Yeah, you got it. You said the word monthly a little bit ago. A lot of times we are used to getting money on a paycheck every two weeks or maybe twice a month. It seems like when you flip over to retirement it turns into a monthly situation. Your pension shows up once a month. Your social security shows up once a month, so oftentimes when you're taking money out of your investments, you end up taking that out on a monthly basis. It's kind of like your new paycheck schedule is once a month from these different areas.
Aric Johnson: Gotcha. That can take some discipline to change.
Jeremy Keil: Yeah, it takes a little bit of discipline, but at the same time we're trying to get it as close as possible to where it was before. So instead of taking money out for the entire year, letting it sit in your savings, and then taking it out of your savings every single month, it is nice to get into that regular habit. So your regular habit before was every two weeks. Now it's still a regular habit, but maybe it's once a month.
Aric Johnson: Or maybe you could stagger it, so if you're getting a social security check, you know when that's coming, and then you take your retirement check two weeks after that, and then you're on a schedule for every two weeks, right?
Jeremy Keil: Yeah. You're right on it. A lot of times the pensions might pay out on the first of the month, so people will ask us to pay out their account money, their investment money, on the 15th or 20th. A lot of times social security comes either the second, third, or fourth Wednesday of every month, so that's kind of towards the middle or later half. So if that's your regular cadence, then maybe take your investments on the first of the month. Maybe that's what works out better for you. We talked about investments earlier. A lot of times people are relying on their investments for their retirement income. It seems like a lot of people who call themselves investment advisors are saying, ok, you're invested for the long-term. Go with the stock market. That usually works out for the best. That usually word doesn't really sit well with me. It doesn't usually sit well with a lot of retirees. The stock market is great for the long-term type of money, but we're talking about the short-term. If you need money next month, next year, or next couple of years, how much do you really want to be relying on that type of money that might not be up that month. We were just looking at some statistics that say that the stock market's up about 53% of the days, so it's kind of like a coin flip. The market's up 53% of the days. On a monthly basis, it's up 63% of the months. So if you need money out every single month, the market's down 37% of the time. That's what history has shown over the last 90 years. I don’t know if you really want to rely on that, something that's going to be up only two thirds of the time. We still like to keep the stock market in the long run, and the only way to keep the stock market in the long run is to set aside some money for the short run, and that's what we're talking about today: how much should you have set aside for the short run to make up that gap, to make up that difference between what you're spending and what you'll be making in retirement.
Aric Johnson: All right, and it's obviously individualized, right? You work with each client individually because everybody has different needs, so how do you approach this conversation with them and start working through this?
Jeremy Keil: Well, that's why this is the third part. The first part is figuring out how much you need to spend. You might spend more for health insurance the first few years. You might be making less the first few years because you've waited on your pension or social security. You might be making more the first few years because maybe one of you retired but the other one's still bringing in a salary. So we like to project out through your lifetime what your spending level is going to look like, and then project out through your lifetime what your income level is going to look like. That way we can see on a year to year basis what the gap is. What's that gap? The software we like to use shows it in the red, so what's that red amount that we have to take out from the investments. The other part too is some people say, well, what's the percentage I should have out of the stock market? How much money should I have in the bank? We don't like to think of it in terms of percentages or dollar amounts. We think you're better off referring to it or making decisions on this based on years. Do you want to have the next one to two years of your income set aside out of the market? Do you want to have the next three to five years of your income set aside out of the market? Decide how comfortable you are with allowing your long-term money to stay long-term with the chances that maybe you do have to take some money out of the market when it's lower. Think of it as more of a years situation. Maybe you say, you know, if I don't have to touch this money in the market for five years, I feel comfortable with that. Or you say, I like the stock market. I want to make a little bit more if I can, so I want to have more over there, but I do want to have maybe one or two years set aside in the short-run. So think through how much risk you want to take in a way, whether you want to have a really big short-term or if you want to have a smaller short-term. A lot of times you'll be looking at that chart of what you will make and need and you might see a really big point like, oh, I'm waiting for three years on social security. Well, maybe that's your answer. Maybe the answer is you wait three years on social security, so you set aside those first three years of shorter term, interest rate type of investments that you can rely upon because in three years you'll have social security to rely upon for that money.
Aric Johnson: Got it. That makes sense
Jeremy Keil: Yeah, so it’s definitely individualized, but it's a similar process because that's how you go through and find the best answers for folks. It is just seeing those differences and deciding how conservative you want to be, which means you've got a long short run, or how aggressive you want to be, which means you have a short short run. A lot of people are asking us, when do I start doing this? When does my money go from being long run, kind of pre-retirement, to retirement type of money? And our answer is that it's usually about five to ten years ahead of time. This one company talks about the retirement red zone. I forgot the company, but that's a great phrase, and what they're talking about is how the first five years before your retirement and your first five years into retirement are a really big deal. If the stock market happens to be horrible for those 10 years or happens to be great for those 10 years, it will make a huge difference for you. You can't really control what the market's doing. You can control a little bit about your retirement date, but you can't control what the market's doing the first five years before you retire and the first five years after you retire. So as you're approaching retirement our encouragement is that perhaps you need to start thinking about how we bring down our risk, and the way that we suggest doing it is to ignore what a lot of the financial magazines will say. They'll come up with stuff like, take a 100 minus your age and that's how much you should have in the stock market. If you're 60 years old and a 100 minus 60 is 40, you should have 40% in the stock market. Our encouragement is to think of this in terms of years. Don't go with a formula that's supposed to fit everybody because if it's fitting everybody, it's fitting nobody. The way to fit you is to look through when going into retirement say, is the market up? Is the market down? If it is up and you’re seven to ten years away from retirement, maybe you ought to start pulling some money out of the market in order to start setting aside some years of savings. So we don't think it's the best choice to say, well, I've got a certain level risk. Let me just bring the whole thing down. We think it's a better choice to say, oh, for those first two years of retirement I need $40,000. Those first two years are $40,000 a year. So perhaps when the market's up and you find some times when there's some profit there you start shaving off some of that profit and setting it aside in some interest rate type of accounts. So you get to a point where you say, well, I've got my first two years covered. Then you feel more comfortable retiring knowing that if the market's down you’ve got the first two years of retirement money coming out and good to go. It doesn't have anything to do with the stock market at that point in time.
Aric Johnson: So what that also does is it allows the market to rebound a little bit maybe, right? So if it does go down in the first year that you're retired or right before you retire, you have that money set aside, you're able to live off of that, and over those next two years hopefully that market starts to rebound and come back up. That way you are not selling low and buying high, which a lot of people do when they try to time the market. This allows you some flexibility, and even if you're saying, I need $40,000 a year, so you've got $80,000 set aside for those two years, if you see that the market is going down and that economy is getting a little bit worse, you can tighten the belt a little bit if you need to. You are able to say, you know, now I want this to last two and a half years instead of just two years. Maybe I'm not going to go out to eat as much, or maybe I'm not going to do this trip that I thought I would do at this point. I'm going to wait for a little bit to see how things play out, but it gives you a ton of flexibility and I think a lot of peace.
Jeremy Keil: Yeah. It gives you flexibility. It gives you time. When you're 30, 40, or 50 they say, oh, you're investing for the long run. Well, we think you still have a long run when you hit retirement. We mentioned earlier in a previous episode that if you retire at 62 and there's two of you, on average your money ought to last for 30 years. Pretty sure 30 years is long run type of money. The issue is that you went from having a long run to having a long run and a short run, and it is incredibly important for you to decide how long your short run is and if that's the right number for you. If it's two years, four years, five years, seven years, or whatever it happens to be, make sure you carve out that money out of the stock market so that you don't have to rely on the stock market for whatever it is for your short run that you're planning on. You can let your long run money actually be long run if you're using it five or ten years from now. It's not long run if you're using it five weeks or ten months from now. Another part of this that's important too is thinking about these kinds of standard retirement recommendations. I don't know if you've heard of this 4% rule idea?
Aric Johnson: No, what's that?
Jeremy Keil: Yeah, they came out with it like 30 years ago, but the idea is maybe all you need to do is just take out 4% of your money each year and you'll be able to keep up with the ups and downs of the stock market. That sounds nice, but I haven't met anyone that's spent 30 years in retirement and spent the exact same dollar amount at the beginning as at the end where there's no fluctuations, where their taxes didn't go up and down, or where their healthcare costs didn't go up and down. So it looks nice on paper where you retire and your pension just goes from the day you start to the day you're gone, your social security goes from the day you start to the day you’re gone, and you take out your 4% from the day you start until the day you are gone. It doesn't quite match up with reality, especially for a lot of people that retire before 65. If you retire before 65 you can't get Medicare yet, which means you've got to figure out your health insurance. A lot of times those health insurance costs are higher than when you were having it subsidized by your corporation. When you are working, a lot of times your company's helping you pay for the cost. Real quick on that, a lot of times people get into this COBRA situation. They say, COBRA is so expensive. No, it's not. It's exactly what it cost when you were working. It just seems that way because you are paying 10, 20, or 30% of the costs and somebody else's paying the difference. When you get on COBRA, you're paying the full bill. It's not that it got expensive all of a sudden, it's just that nobody's subsidizing it. A lot of times there's this difference between when the company is helping you out when you're working and when you retire when you maybe don't have any health insurance outside of what you have to buy on your own until you're 65 when all of a sudden the government starts helping you out. So if you've got nobody helping you out and you want to retire early, it’s probably going to cost you more for health insurance those first few years, whatever that dollar amount is. It is similar to our idea earlier that just because you're waiting on social security doesn't mean you live in the poor house until you get social security. Just because you've got some extra costs for those first few years doesn't mean you have to live on less, right? If you decided that you need $80,000 a year for retirement, but your insurance is going to cost you $10,000 more a year, maybe just plug it in and realize that those first three or four years will cost you that higher dollar amount knowing that later on it won't be costing you that higher dollar amount. So maybe you have this expense. Maybe it is extra health insurance costs. Maybe the expense is that you're paying off your mortgage if you still have a mortgage. Hopefully that doesn't last for your whole retirement. A lot of times in the first few years we do see people paying off their mortgage. If that’s money you need for the first few years, you have to take that out and make sure it’s set aside in a place that you can rely upon.
Aric Johnson: Yeah. Jeremy, you've given a lot of ideas in this one topic and you've given a lot of tips, but I am hoping that you'll bring it all back around and kind of put it altogether with how you do this? How does somebody do this, and how do you specifically help your clients do this when it comes to putting all the tips that you've already kind of talked about in order and helping them out?
Jeremy Keil: Yeah, you got it. It's going through and figuring out, how much are you going to be spending in retirement? Like we just mentioned, it’s going to go up and down. You might have more spending in the beginning points. You might have less spending later on. It's figuring out how much you will be making in retirement. You might have more or less at different times. You'll see a difference. You'll see that gap between what you're spending and what you're making. That's the amount you need to be taking out from your investments. In our opinion, if you're looking at your short run money, you have to take that money out of the stock market and put into some place, whatever it might be for you, that you can rely upon. It's usually more short term interest rate money. So step one is figuring out what that gap is. Step two is figuring out how many years of the set aside money you feel comfortable with. Would you rather have one to two years of money set aside? Would you rather have five to seven years of money set aside? Real quick on that subject, a lot of times it's the beginning part of retirement that's a bigger deal, so you may want to have a little bit more set aside at the beginning part of retirement then you do later on because later on guess what, you made it! The stock market is a big deal if it drops at the beginning of your retirement. It's less of a big deal if it drops at the end of your retirement, so perhaps at the beginning of retirement when it's the riskiest financial time of your life, you counteract that by being a little bit more conservative than you normally would be. Once you made it a few years, perhaps you can dial down that short run and rely a little bit more on your long run area.
Aric Johnson: Jeremy, one of the things that I keep thinking about is, like we said before, you set aside some extra money on the front end in case the market does something a little funky, but the other piece is that I think most people when they first retire say, now I want to travel someplace. Now I want to go do something. Now I want to take that special trip that I've been waiting on, and let's be honest, the things that are going to increase later in your retirement years are probably going to be some healthcare issues as you age. I'm not that old, and I'm already on a pretty good Tylenol-ibuprofen regimen because of certain things that I've been doing through the years, but it may be that time to say, you know what, I want to celebrate my retirement and you know, the wife and I or the husband and I are going to go and do this trip and we're going to have some fun. And those are the years that you're going to be more active in retirement. You may slow down a little bit later. I don't think everybody should be watching the market because that causes stress, but it’s important to be able to talk to a financial advisor and say, hey, this is what we want to do. How does it look? Are we good to go? And Jeremy, I know you have had that conversation with your clients because they rely on you to be able to say, hey, you've set this up really well. You know what? Enjoy yourself. Italy's beautiful. Have fun.
Jeremy Keil: Yeah, that's exactly it, and if you are planning for that, and you know that's an upcoming expense, you gotta have that money set aside so you don't tell your wife or your spouse, yeah, sorry honey. We can't do that trip because the stock market dropped 20%. If it's coming up and it's in your short run timeframe and the market's higher, maybe it's a good time to take some profit and throw it into the area that you've got set aside for the short run so that you can enjoy it more and not worry about what the market's doing on a day to day basis because you've got your day to day covered by the money that you're making or the money that you set aside for your next month or next year or whatever it happens to be for these amounts that you'll be taking out.
Aric Johnson: Yeah, absolutely. Fantastic.
Jeremy Keil: Yeah, it's been fun. We're over the hump. We're halfway there.
Aric Johnson: Yeah, we are. So this was number three. Remind us again what number four and five are.
Jeremy Keil: Yeah, number four is talking about, what do you want? If you need some money next month, you probably want to have some money in the future, and that is your long-term type of money. So it's about deciding what you do with that long-term money. How do you set that up? Then the last part is, what do you leave behind? We like to say you either leave behind some money or you leave behind some bills, and it's important to figure that out and be prepared for either one of those situations.
Aric Johnson: Yeah, absolutely. I just think that everybody's in a different stage of life. One of the things that kind of popped in my head while we were talking is that some people may have bought a house a little bit later in life, and so they still will have a mortgage for the first year or two that they're in retirement. That's something else that they can look forward to once they stop paying that mortgage since that will almost be like an extra paycheck coming in. If they're paying $1,500 a month two years into retirement, that mortgage being paid off will be an extra $1,500 a month that now can be allocated for something else, so that's exciting.
Jeremy Keil: Yeah. Be ready for it. Make sure you know what's coming up.
Aric Johnson: Yup. Absolutely, and part of planning for it is speaking with a professional, so as you're listening to these podcasts it’s obvious that Jeremy is very knowledgeable. His team is amazing. Don't just take what we say, run with it, and say, hey, this is what they advised because that's not what we did. We're telling you this information because this is information everybody needs to hear, but you need to talk to a professional. Jeremy is the constant professional. So Jeremy, if they want to get ahold of you, how do they reach you?
Jeremy Keil: Yeah, check us out online at keilfp.com, or give us a call at 262-333-8353. Looking forward to hearing from you.
Aric Johnson: Fantastic brother. I love spending time with you on these podcasts. I learn so much. I appreciate your time. Thank you again.
Jeremy Keil: Yeah, thank you Aric.
Aric Johnson: You bet, and thank you audience for listening to the Retirement Revealed podcast with Jeremy Keil. If you have not subscribed to the podcast yet, please click the “Subscribe Now” button below. This way, when Jeremy comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends and family. Again, thanks for listening today. For everyone at Keil Financial Partners, this is Aric Johnson reminding you to live your best day every day, and we'll see you next time.
Thank you for listening to the Retirement Revealed Podcast. Click on the subscribe button below to be notified when new episodes become available. Visit Retirement-Revealed.com to learn more. The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.