Bob and Jane come into my office to discuss when they should file for Social Security.
Three things I need to know to guide them: 1. What their PIAs are. (Don’t know what PIA is? Click here🙂
2. What their Income NEEDS will be.
Now this is SO much more important than simply taking a percentage of current income, like 80%. This is a rule of thumb that is highly used in the industry but is not specific enough to YOU. We need to understand truly what your expenses will be!
Everything, and I mean, EVERYTHING is contingent of an accurate accounting of your cash flow needs…in retirement.
What you spend today may have no relationship to what you spend in retirement. So, there is some guesswork involved but it’s important to take the time to truly analyze and predict future expenditures.
3. Value of their liquid net worth. Liquid net worth includes your investment accounts and bank accounts. Any type of accounts that can be quickly converted to cash to be used to live on.
Once we identify these three things, we can come up with a pretty thorough idea of when is the best time for Jane and Bob to file for their Social Security benefits.
It will be important to understand the health of both too. After all, if Bob isn’t long for this world, we probably will have different planning than if he most likely to live until he’s 100.
In this video, I use a very simple Google Spreadsheet to analyze the options Jane and Bob have when it comes to optimizing Social Security.
You can easily recreate this for your own analysis as well.
What is the number 1 concern for people thinking about retirement?
Running Out Of Money
Turns out they are mostly worried about running out of money. Can’t blame them actually. Who wants to go back to the workforce after 5 years of retirement? Shoot, would you even be able to go back to where you left? Probably not. So, a career as a Walmart greet waits you…
Well, not so fast!
Spending Goes DOWN In Retirement
Lots of studies have come out over the last 15 years or so that shows as people get older in retirement they actually spend less each and every year. And, yes, this does include health care expenses too.
Weird huh? I mean why haven’t more people been saying this stuff. Come on, you’re not that ignorant are you? The investment industry has a huge incentive to get you to save, save, save in order to charge you fees for that savings!
I’m not saying don’t save. Indeed, I think you should, up to the point that it makes sense to stop. And that is where consumption comes in. How much will you actually need in retirement?
80% Of Your Current Income??? Stop!
Please do not use the 80% of current income rule of thumb. There is no validity to that whatsoever. Is it applicable for some? Sure. But so isn’t using 120% or 40% of current income. Yet, we don’t use those numbers.
The interesting thing is most Americans don’t spend nearly what they are told they will in retirement. There are reasons for this, actually. As they get older they lose desire to do some of the things they did when they were younger.
Getting Older? You’re Probably Going To Spend LESS
Look at me. I’m 47 right now. The last thing in the world I want to do is go out on New Years Eve. But, man oh man, 20 years ago???
In this video, I share with you the article that started the whole “Reality Retirement Planning” discussion. A financial planner in WI, Ty Bernicke found that his older retirees were spending much less than his younger retirees. He wondered if there was something to that
BLS – CES Study
Lo and behold, there was! He researched the Bureau of Labor Statistics and their Consumer Expenditure Survey and found that as people get older they spend less…a lot less.
Again, will that happen for everyone? No. Will it happen for you? I have no clue. But the numbers are the numbers and what BLS reports is that people do spend less as they age.
Now this may be attributed to them running out of money and thus being forced into lesser spending. Maybe But in Ty’s practice and mine as well, that hasn’t been the case.
My Experience With Retired Clients
The retirees I’ve dealt with in my 20+ yrs simply are more frugal in retirement. No other way around it. SO, because of that they seem to add to their portfolios each year, even when accounting for Required Distributions.
A guy over at Fool.com wrote an article in 2016 and updated in 2017 about his experience in living on $3700 a month income.
What’s Your PIA?
When you factor in Social Security with a PIA of =$1800 for one worker and his spouse taking half that benefit, you’re getting $2700 a month in Social Security Income, which means you only need your portfolio to generate $10k a year.
$10k/.04 (using the 4% rule) means we need a portfolio of around $300k to be conservative to make it.
Have you ever heard that? I bet not.
Pay The Mortgage Off
Now, the one thing I will tell folks is that if you go into retirement DEBT-FREE you will be in a better place, regardless of anything else
Try to do that one thing and you’re going to be in a pretty good place.