Capitalist Investor

Navigating Retirement Savings: How Much Can You Safely Spend? Ep. 283

• Strategic Wealth Partners

Share episode

In the latest episode of the Capitalist Investor podcast, hosts Derek and Luke discussed several important financial and investment-related topics that can help you make informed decisions. Here are the five hot topics discussed in this episode:
1. Peloton's Financial Struggles
Peloton, once a pandemic success story, is now facing financial hardships, with bankruptcy looming over its future. Derek shared how he had invested in a Peloton bike before the company became a household name during the pandemic. Despite its current financial situation, Peloton’s journey offers valuable lessons for investors—highlighting the importance of assessing long-term viability even when a company is thriving in the short term.
2. Understanding Retirement Spending and the 4% Rule
A significant part of the episode was dedicated to the topic of retirement spending and the safe withdrawal rate. Derek and Luke delved into the well-known 4% rule, discussing its origins and contemporary relevance. They emphasized that understanding your lifestyle and expenses in retirement is crucial for creating a sustainable financial plan. They also noted how inflationary pressures and changes in market conditions might necessitate adjustments to this rule.
3. Adjusting Return Expectations in Financial Planning
Luke brought up the changing landscape of market returns and how historical rates may no longer be applicable moving forward. He stressed the need for conservative rate of return assumptions in financial planning to better prepare for future economic conditions. Derek echoed this sentiment, cautioning against relying on flat rate assumptions that could significantly overstate one's financial success prospects.
4. The Purpose of Financial Planning Beyond Wealth Accumulation
The hosts addressed a common misconception: the belief that the role of a financial advisor is primarily to maximize wealth. Instead, Derek and Luke explained that the true goal is to help clients identify their life goals and develop strategies to achieve them. They emphasized balancing risk and return to meet lifestyle needs rather than aiming for high-risk, high-reward investments that could jeopardize financial stability.
5. Importance of Lifestyle Management for Younger Generations
In a message directed at younger listeners, Luke discussed the pitfalls of "lifestyle creep," where increasing income leads to higher spending rather than saving. He encouraged young professionals to be mindful of their spending habits and to prioritize financial freedom over material possessions. This segment served as a timely reminder that wealth isn't just about income but also about how you manage and allocate your resources.
These hot topics offer valuable insights into making informed investment decisions, planning for retirement, and managing personal finances. Whether you're a seasoned investor or just starting your financial journey, these discussions provide essential knowledge to help you navigate the complex world of finance.

Hello, and welcome to this week's episode of the Capitalist investor. As always, you have me, diamond hands d, and cool hand Luke. What's going on, man? What up? I need more coffee. I haven't woken up yet. Well, lots to talk about. Lots to be excited to be awake about today. So we'll get back to the planning corner here, I guess. Start working out in the morning. I think that'll just, you know, I've been lazy recently. Think about woke up or worked in the morning. Worked up, you know, worked out in the morning. I think be more energized every day. That's 100% facts. That would definitely happen. Yeah, I'm having a hard. I've been trying to do it when I get home. Um, but, yeah, it's way better. You have a gym in your basement or something? I just got, like, a peloton and some weights and stuff. Peloton. We remember at life on. They're going bankrupt. Yes. That's one thing I actually got right. It's gonna be an heirloom one day. When they do go bankrupt, you can sell your peloton maybe for, like, 20 grand, because, you know, you can't ever get a new one. Ever. Hold that thing for 20 years. It'll be legendary. So, you know, I guess this is like saying you listen to John Mayer before he was famous. I had the peloton before the 2020 Covid stuff. So there's, like, there was a place by my house that I used to go to that did, like, the spin classes. Yeah. So I don't know. It's. Well, it's interesting from an investment standpoint. You know, losing money is never fun. It's relative for everybody. Like, you know, a $10,000 loss to somebody with$50,000 portfolio, it's heavy compared to someone that lost$10,000 and has a $5 million portfolio. But if you look at the Peloton founder, I'm pretty sure he's worth, like, $2 billion now. He's worth, like, I think, 100 million, which I get. He's still worth $100 million. But can you imagine, like, in the back of your head, like, knowing that I don't. You lost $2 billion in the back. Like, I don't know. Like, to me, that'd be like, I was a billionaire, and now I'm not. Like, I get you're still worth 100 million, but, like. So it hurt. Yeah, that would be real rough. So, you know, if you have invested all your money in Peloton, you should probably run your financial plan again, just to check that out to make sure your spending in retirement will be okay. But that's what we're going to talk about today, kind of your, what's the safe rate of retirement spending? You know, you always hear the kind of the 4% rule, so, you know, we'll talk about that briefly and why it's so important. I'd say it's really the most important number that you have to have when you are getting ready to retire is understanding how much you're spending. And I will, you know, I always tell my clients this. It's not my job to tell my clients how to spend their money, even though sometimes it turns into that, you know, when they call in and ask for money, it's like, it's your money. You don't have to give me, like, a full explanation on exactly why you need this. But, you know, I still get the write ups. But yeah, understanding your spending in retirement is really going to be the most important number. So I'll kind of kick things off. Your lifestyle is really your expense number when you're in retirement. So when you think about it this way, you say you're making $100,000. Let's say you're saving 10,000, you're paying taxes. We'll call that another 20,000 if you're not saving anything while you're working. In that scenario, your lifestyle would be about$70,000. If you're taking most of your cash from retirement accounts, qualified retirement accounts, you're still going to have to pay taxes on that money. When you flip the switch and you get into retirement, your expenses aren't magically going to go down by another$20,000 in that scenario, I would start with $70,000 as the spending number. And yeah, maybe you're not driving to work as much, and maybe you don't have some of the other expenses that come with work, but those are pretty small, honestly. So we need to understand how much we're spending so we can work that into the plan. And it's really pretty much that simple with the calculation. But we have to understand that our, I've run hundreds of plans. I've really never seen spending go down in retirement. And usually in the first five years of retirement, people have a bunch of stuff they want to do, take big trips, visit family, all that good stuff. So all of that needs to be accounted for in the plan as well. So the 4% rule going off of the calculation, has it changed over the years? How much has that changed. And why has it changed, Derek? Why has the calculation changed? So, like, is it 3%, 5%, 6%? Like, what is it now? Because, like, inflationary pressures changes things, right? The world changes, taxes change. You know, one thing I always go back to is, is a safer rule of thumb, like, two or 3% off the 4% rule. Like, you know, I think the game's changed a little bit given that, you know, even market expectations, a lot of the gains have been pulled forward. So can you, you know, the seven, 8% a year we were used to compounded annually? You know, maybe that's not the case anymore. Right. So you have to understand how the world changes, and, again, how your financial plan then changes around that as well. Absolutely. Yeah, that's a great point. Just because you've heard somewhere that, you know, 4% is a good withdrawal rate doesn't necessarily mean that that is even still correct, and it doesn't mean it's correct in your specific situation. But, yeah, that's probably one of the most, maybe conservative things that we do on our financial plans. But we always tone down the rate of return, definitely from historical rates of return, because what Luke just said is, I don't want to say it's a sure thing, but it's one of the most sure things I can think of. The rates of return going forward are not going to match what we've seen specifically because of pulling all those earnings forward. Look at what we saw between 2009 and 20, 1618. So it's. It's not going to be like that forever. So, you know, you want to make sure your plan accounts for things like that. You definitely want to make sure your plan doesn't have a flat rate of return, because we've seen. We see that all the time. You know, not many people walk in here with the plan, but if they do, it's usually a goal based plan using a flat rate of return assumption, which is going to definitely overstate your chances of success. And like most people think that our goal as financial advisors is to make the most amount of money possible for somebody or tell somebody they save more money, then that's not the case. Our goal is to make you think about your goals, what your objectives are throughout retirement, and then develop you a pathway or strategy around how to get there right, and then increase your chances of success getting there. And if the case is you want to go on a couple bucket list vacations and you want to spend a certain amount of money, you know, we don't need to shoot for the stars and make you more money than you need to, then to go over the lifestyle you want to live, because that usually entails taking on more risk. Right. So we don't want to hinder your chances of success by trying to hit home runs again. I always, for the most part, in majority of people's situations, hitting singles and doubles win games, not triples and home runs. When you're 25, 30 years old, sure, you can try to hit a couple home runs and we strike out. You have a lot of time, you know, to get back on your feet and to, you know, get back in the rhythm of things and, you know, win some ball games. But, you know, when you're in fifties, 60, 65, 70, retired, you, you can't strike out. Yep. So yeah, you know, the, the last thing I'll say just because dealing with all these plans, if there's only really, once you get into retirement, there's really only two things that you can do. You can either spend the money that you have or you can give it away after you pass away. So also keep that in mind because I do see a lot of people who don't really have that big of a wish to pass things down that are basically spending no money at all. So you don't, you know, there's only two things that can happen there. So either come up with a plan to do the things that you want to do, maybe spend a little bit more, especially upfront in retirement, or have more open conversations about passing assets down. Because if your plan says you're going to have a couple million dollars left at the end of the plan, the time to talk about that is now, not at the end. So make sure that you take a look at that because I don't know if it's a generational thing, but the whole point of the plan is to give you confidence to spend money so you don't have to have this plan go through all that trouble and then not spend. So keep that in mind. And those people maybe could have retired earlier too. So that's, that's another planning consideration. So just make sure you're taking all those different thoughts into account when you're, when you're coming up with your retirement plan. And I, real quick to sum this up for talking, I'm going to talk to like the, I don't know who's listening to this, that's in the twenties or thirties, younger, but like, I also think it's important to, as you grow in your career, make money, more money, you know, the wealth effect or whatever it be income effect definitely is real, right? So, like, you make more money, you start spending more money, you start up in your lifestyle, right? So the key is at some point in time to keep on increasing your income, but stop increasing your lifestyle as well. So that way you truly find a budget that works for you. And I don't know, I was watching a video coming into work today. It's like, you know, 25, 30 years in the future, you're gonna look back and say, I wish I was as healthy as I was 25, 30 years ago. Right in this current moment, like, you know, if you're healthy, you know, you're gonna look back and say, you know, I felt good back then. It's same thing with, from a financial standpoint, like, you know, we actually are better off now than we ever have been in history in regards to like, you know, having the middle class is wealthier than ever, essentially. Like they were, like, even though it doesn't feel like it, but 100 years ago, like, people were not doing anything, like they were not being able to go out to eat. Restaurants didn't exist for the middle class american. It was like, it just, the lifestyle has increased so much. So I think it's important in today's world. I don't want to preach here, but I'm going through it myself. A lot of ways, the materialistic nature of life is not the most important part of life. In a lot of ways it really isn't. So I think it's important. I'm preaching the younger generations here is be conscious of that lifestyle creep and ask yourself, does it really matter or is it going to make you happier? And probably not. So what makes you happy, I think is true freedom and not being a slave to the system for 50 years, right? Absolutely. Yep. Just to buy the Gucci handbag or whatever. Food for thought. Good stuff there. All right, well, thanks for listening this week. If you guys have any questions or show ideas, hit us up at info connect.com and have a great week. Opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.