Navigating the Retirement Risk Zone

Hey, everybody.

Welcome back to the next episode
of Navigating the Retirement Risk Zone.

In this episode,

we're going to be talking about

how to know when you can
spend more money in retirement.

The root of this topic
comes from a problem

that I call the permission
to spend problem.

I've done a video about this on YouTube,
but just really briefly, introducing this.

Retirement is all about matching
how much you would like to spend

with how many years you expect to live,
and then backtracking out

with how many years you expect to live,
and then backtracking out

how large a portfolio you will need
in order to support that spending

how large a portfolio you will need
in order to support that spending

And the permission to spend problem arises
because the amount of uncertainty

around this formula, what ends up
happening is that without a good grasp

around this formula, what ends up
happening is that without a good grasp

of how to measure risk
and likelihoods of success

as human beings, we tend to default
to being overly conservative

and arising this permission
to spend problem,

which is the fact that retirement
planning has traditionally been

oriented around the what
you shouldn't do,

somewhat you can do,

is you shouldn't spend more than this,

you shouldn't spend this amount,
you should cut spending, do this.

The goal of saving all those years
to prepare for retirement

is to maximize your satisfaction
later in life, right?

To rely less on work and more on savings

to support the activities
that you want in life.

And the problem is that
when we make decisions out of fear

or when we don't have great levels
of certainty or comfort with what

the outcomes,

the future potential outcomes
could be of financial decisions we make,

we default to a place of anxiety
and we end up being overly conservative.

we default to a place of anxiety
and we end up being overly conservative.

The goal of this specific podcast
is to help think about

making a shift in retirement
planning from one that is

a retirement planning based on fear
to retirement that is based on fun.

So in this podcast,
we're going to talk about

how to know
when you can spend more in retirement.

Now, really quickly, everybody,

thank you for watching
and supporting the podcast or listening.

I'm always open to new subjects
and new topics, so if you don't mind,

please leave some comments or send us
an email using the email address

on our website about different topics
you'd like us to cover in the podcast.

on our website about different topics
you'd like us to cover in the podcast.

And with that said, let's jump
right into the permission

And with that said, let's jump
right into the permission

to spend problem
and how to know when you can spend more.

And let's break
this problem down really quickly.

So what contributes to the permission
to spend problem?

It's really broken into two parts.

There's the psychology
and then there's information.

There's the psychology
and then there's information.

The psychology is that
we have this fear of running out of money.

That's the predominant fear in retirement
because we have this uncertainty around

how long will live, around how
much money we may spend,

about what inflation might look like,

about what market returns might look like.

And so the paralysis

of spending our money comes
from all of these levels of uncertainty.

And then there's a second

layer of paralysis psychologically
that comes from having so many things

that you can optimize, you know, you can
do you do Roth conversions, do you not?

How do you sequence your withdrawals?

Do you take money from tax
deferred accounts or tax free accounts?

Do you go for ACA subsidies
and on and on and on?

Do you go for ACA subsidies
and on and on and on?

And the list goes on and on.

And so we end up with this paralysis piece
that comes from having too many things

to consider, but a really difficult way
of prioritizing them.

to consider, but a really difficult way
of prioritizing them.

Right.

Because we think we might have
to do everything on that list.

We don't really know
the impact of each item on the list,

and therefore
we don't know what to focus on first.

And so we end up kind of paralyzed.

And that contributes

to the psychological component
of this permission to spend problem.

to the psychological component
of this permission to spend problem.

The informational component comes
from the fact that there's really just

there's no other way to put it.

There's this terrible
one size fits all information out there.

The problem is one size fits
all information is not real.

You are completely unique.

You have your own income sources, your own
age, your own family health history,

your own preferences around how much money
you'd like to spend, how much you like

to leave to heirs, whether you'd like
to leave anything to heirs.

And so these kind of one size fits
all information items that give us

they reduce decision making friction,
but they're actually terrible heuristics

or rules to follow.
I'll give you a couple example.

The 4% rule.

Roth conversions
are for everybody.

Social Security at age
70 is always the best.

I should try to opt in for ACA
subsidies because it's free money.

And taxes are always bad.

These are five examples

of kind of hard and fast rules that I see
in the retirement planning universe.

And I'm not saying
that you should throw them all away.

What I am saying
and what we will do in this

video is go through
each of these one by one briefly.

And what you should do
is keep the good and toss the bad.

And what I mean by
that is find out what's applicable to you

and your unique personal situation

and then adopt these kind of hard
and fast rules to fit your framework.

And so the idea of this topic is how
to know when to spend more in retirement.

And the way you do that is you solve
the permission to spend problem, right?

We want to find out how much wealth
have you accumulated over your life

and what is the maximum amount of money
you can spend out of that

Flipped this on its head.

What's the maximum amount of money
you can spend and understand

the different probabilities
and the likelihood of success or failure

and then what
contingency plans are available

if you need to ratchet down your spending
based on something that happens.

Right.

So there's really a five step process
to how to solve the permission

to spend problem.

And we are going to go through
those five items that I just mentioned.

So I'll just repeat them really quickly.

Terrible one size fits all information.

So the 4% rule, we'll talk about it.

Roth conversions are for everyone.

We'll talk about it.

Social Security at age 70.

ACA subsidies because it's free money.

And taxes are always bad.

We're going to talk
about all five of those.

And in the future,

I'm going to make individual podcasts
and videos about each subject.

In fact, as of me recording this video,
I have a video that's coming out shortly

about the 4% rule that breaks it down
in great, great detail.

And shortly
after that I'll have a separate video

about Roth conversions
and a follow up video about ACA subsidies.

So they're already kind of in the works.

Just you'll keep your eyes

peeled on the YouTube channel
and on the podcast for those.

But how do we solve the
permission to spend problem?

So it's a sequence.

Proper financial planning
and education is the root of it.

And the reason is as follows.

One of the reasons

we run into the permission to spend
problem is if you've been a great saver

and you've accumulated wealth,
what you've done is you've hypertrophy,

you've overdeveloped the saving muscle,

the saving muscle has developed
by making sacrifices in the here and now.

So that you can defer

or delay gratification
and have a benefit in the future.

So you cut your current day spending

with the promise that that
will pay off in the future.

And that's what savings all about.

Now, the problem is great
savers over develop that muscle

and then they have a challenge
in reorienting

or redesigning their decision
making framework to allow themselves

to spend the money
and the wealth that they've accumulated.

Right. And so there's a process.

And one of those things
you have to understand

is that it will be a process,
it won't happen overnight.

And we have to buy into the process
of retraining our brain

and retraining our behaviors
to allow ourselves to find the tolerances

of what we can spend in retirement
and still meet our legacy goals

and still have
the right level of confidence

and have the right
contingency plans in place.

Now, this brings us back
to how we solved the problem.

The first step is build,
planning and education.

Really, the first first step
is the educational process

Really, the first first step
is the educational process

of building a financial plan
or a retirement plan

with the right guidance

will actually hypertrophy
or overdeveloped your spending muscle

or you pay yourself muscle and reteach
you how to understand that process.

You go through a slow,
intentional education process

that talks through all the scenarios
and the plan and what the tolerances are,

and you will find yourself slowly
over that process, retraining yourself

to think in terms of now

it's time to draw from this money
that I've spent all these years saving.

The second point here is the educational
process of building the plan and reviewing

The second point here is the educational
process of building the plan and reviewing

all your scenarios will help
you appropriately determine if and which.

And this is really critical
if in which of the one size fits

And this is really critical if and
which of the one size fits all

informational tools
actually applies to you.

And I say if and which because for
some people none of them will apply

and for some people,
some of them will apply.

Now, we'll talk about each of them
in a second.

But the idea is you have to find
the ones that fit for you.

The third step is once you build some,

if then or what we call contingency plans
in the planning process,

that will help you remove decision
making friction

around what to do in your retirement plan
and also how to spend.

Right.

So having contingency plans
like think of it like a a threshold

when we have no retirement plan in place
and minimal knowledge,

we're a zero out of 100
or a ten out of 100 on the confidence

scale of how likely we think we are
to run out of money or how likely we are

we think we are to survive the rest
of our life without running out of money.

Now, I've noticed this doesn't matter
how much wealth someone has,

if they're half a million dollars,
$100,000, $2million or $10million,

almost everyone suffers from this at the point
at which they're planning to retire.

They just have a very low confidence level
because there's too many chemicals.

It's a chemistry experiment.

There's too many

there's too many ingredients for them
to make really confident decisions.

Well, when you go
through the planning process

and you build a series
of contingency plans

if this bad thing happens,
I know my backup plan for that.

If this other bad thing happens,
I know my backup plan for that,

then you actually move yourself further up
the confidence scale this threshold.

You move from a 0 to a 20
or a 10 to a 30.

Eventually you move
and it's different for every person, but

each person will cross that confidence
threshold at a certain point

when they have enough
contingency plans in place.

For very, very conservative,
anxious people

you might need tons of contingency plans
and it might need a lot longer

to build those contingency plans
and a lot more volume.

For people that are less anxious,

you might need fewer
contingency plans,

but each person will be unique
when they cross that threshold.

And when you cross that threshold,

you will feel a weight lifted off
your shoulders.

You'll feel a lot less decision
making friction around allowing yourself

to spend money
from the wealth that you've accumulated.

Now, the next step will
be that the plan itself,

the retirement plan
itself, will help you prioritize

the never ending set of action items
or optimizations that can be done, right.

I alluded to this earlier.

Alex Hormozi says this
quote that anxiety comes

from having too many things to do
and not a good way to prioritize it.

Financial anxiety is the same.

We have too many things that can be done.

I should track my budget.
I should do Roth conversions.

I should save more to tax
deferred accounts

or I should do Roth conversions
or I should save more to taxable accounts,

or I should do Roth conversions
or I should save more to taxable accounts,

or I should use a dividend
portfolio versus

a traditional asset allocation
or whatever, whatever, whatever.

The list is just never ending and
we end up with tons of anxiety about that.

And so the process of building the plan
and all the things that we've said so far

actually helps you prioritize
and focus on the high leverage things,

the things that get you
the most bang for your buck

and can be done
with the least amount of friction.

And then finally here,

the process of building the financial plan
is a process of also documenting

and reviewing your plans regularly
with a set cadence that you commit to.

So not too frequently,
because if you do it too frequently,

you'll get neurotic and anxious,
kind of like weighing yourself every day.

There's there's a point
at which weighing yourself is healthy.

There's a point
at which weighing yourself too

frequently becomes pathological
and creates psychological problems.

And then the same idea is
with the financial plan.

Reviewing it too frequently can create
psychological problems.

Now, we also don't want to review it
too infrequently,

and then we end up completely out of touch
with our contingency plans and unable

to execute them, not just becomes naivete
or ignorance, like willful ignorance.

So having the right cadence of how often
you check into your plan will help you

help prevent you from making impulsive
fear based decisions

and help you make decisive, confidence
based decisions.

The idea being that the permission
to spend problem or the ability to

help yourself understand how to spend more
and what the tolerances

of your spending in
retirement will be

comes from moving out of a fear based,
impulsive, decision making framework

and into a confidence
based, decisive decision making framework.

and into a confidence
based, decisive decision making framework.

So let's talk a little bit briefly
about each of these five kind of

one size fits all

information or knowledge juristic
that I alluded to earlier.

I'm not, like I said, going to go into great,

great detail about each,

but I will hit the salient point for why
you should really think about each rule

rather than just buying into it and
living with it without any second thought.

So the first of these rules that I see
influence tons of pre-retirees

into overly conservative
spending is the 4% rule.

The thing to remember
about the 4% rule -- two things.

One is the 4%
rule has kind of been debunked.

The same researcher who did
the original study revisited that study

and found that the appropriate percent
is actually closer to 4.8%.

You can Google this and find this
information. It's public knowledge.

So just the fact that there's
this 4% rule is already misleading.

It's just a catchy way, you know,
think we like things that end in zero.

So 4.0% is easier to say than 4.8%.

But the actual rule is the 4.8% rule.

On top of that, the 4.8%
rule is an overly conservative rule

because it says that in 100%
of the scenarios tested,

you would have not run out
of money while still alive,

which is a proxy
for saying in 100% of the scenarios

you were overly conservative
or spent too little.

Right? So just think about that.

I'm not going to go into too much detail.

Like I said, there's a video
that probably came out

before this gets published or is coming
out shortly after this gets published.

That goes into the 4% rule
in great detail.

But the 4% rule is intentionally
overly conservative because it wants you

to not run out of money
in 100% of scenarios.

to not run out of money
in 100% of scenarios.

The second item on this list is

Roth Conversions are for everyone.

Roth conversions are great.

I've already discussed this
in a recent video as well,

but Roth conversions take a future expense
and bring it into the present.

And that expense doesn't always pay off
until a certain day or age.

Right?

There's an age range
at which the Roth conversion will pay off

regardless
of whether you think you'll be in

a higher tax bracket in the future
or tax brackets are lower now,

there is still an assumption
that you have to live

a certain amount of years before
those Roth conversions will pay off.

Now, I'm not telling you not to do them.

My point is just to consider them,
because if part of your goal has been

to maximize your satisfaction
by having as much spending flexibility

to maximize your satisfaction
by having as much spending flexibility

in retirement
as you possibly can,

then Roth conversions

actually directly work against that
because they will bring an expense

into the youth of your retirement
that only pays off in the older age

or I don't know the right way to say that
the elderly portion of your retirement

or I don't know the right way to say that
the elderly portion of your retirement

because there's a necessary time
for those Roth conversions to pay off

over a period of time.

And I can

I have another video,
but I'll make one shortly,

as I already said,
that shows this break even calculation.

as I already said,
that shows this break even calculation.

There's other things

among that topic that we can talk about,
but I'll leave it at that.

The third hard and fast rule
is that Social Security at age

70 is always the best.

There are many reasons
to claim Social Security at age 70,

and there's really Social Security
is a very, very detailed,

nuanced item that should be on the top
of your prioritization list

of understanding how it works.

And there's many, many complex
creative ways to claim social Security.

62, 65, 67, how you claim with information
about your spouse,

whether you're married,
whether you're not,

whether you have dependents, whether
you don't, tons of nuances to this.

whether you have dependents, whether
you don't, tons of nuances to this.

The idea that there's one hard and fast
rule that claiming at age

70 is always
the best is just completely wrong.

It can be the best
in the appropriate scenarios.

And I have another video on the channel
already about Social Security.

As I said, I'll do other videos
about this in the future,

but if you have specific questions
about Social Security,

you can leave them in the comments.

My recommendation is to always plan
your Social Security claiming

completely, uniquely and individually
to you and start planning for it

three years
before you're even eligible to claim.

So if your 59 is really when
you should start understanding

how Social Security works

and think about how to integrate it
in with your family situation

and your future portfolio situation
and the age at which you'd like to retire.

The next time I'm on this list

here is ACA subsidies
because it's free money.

ACA subsidies.

There's there's this problem
in the financial world

that the government has created,
which is an incentive for rich people

to appear poor so that they get the same

I don't know what you'd call them
subsidies,

but a compensation
that people who have less money would get.

Now, there's no problem
with with taking free money

from the government,
if that's what you want to do.

The problem is if you have enough wealth
that can support, let's say,

$150,000 or $180,000 a year of spending

for the rest of your life with a very,
very low risk

or maybe no risk of running out of money
for the entirety of your life.

But in order to claim the ACA subsidies,
you need to show an income

that is under 3 FP...

three times the federal poverty limit

or four times the federal poverty limit.

Let's say that amounts to something
like $65,000 or $70,000

for the lowest amount of ACA subsidies.

You're actually trying
to get a net benefit.

The total value of the ACA subsidies
might be something like $10,000

after taxes.

This is not exact,
it's just an illustration.

But you're foregoing
spending $100,000 of money

that you could spend with no risk
that would provide you real life

day to day satisfaction
to get this $10,000 net benefit.

day to day satisfaction
to get this $10,000 net benefit.

And you have to ask
yourself, is that worth it?

This only matters for people
who are in that 50 to 65 before Medicare

kind of planning stage.

But the point is just
if you've done a great job saving

and your goal is to figure out
how to spend more money in retirement

and whether you can and maximize
your satisfaction in retirement,

it's really, really important
to consider this and not just do

the planning action item that says
get the free money because you can

because what you'd really be doing
is be giving up some years.

If you're 60, let's say,

and you're trying to use ACA subsidies
for five years to bridge you to Medicare,

you're giving up five years
of the youngest portion of your retirement

to get this $10,000 net benefit,
potentially giving up a 10s or 20s

or hundreds of thousands of dollars of
potential spending that doesn't cause you risk.

And this calculation
should be done on an individual basis.

Just to hit this point one more time,
you can never get age 60 back.

Just to hit this point one more time,
you can never get age 60 back.

You can never get age 61 back or 62 or 63.

Right. Just think of it that way.

You never get each
of those years back.

Is giving up that year

of satisfaction and spending,
if you can responsibly worth it

for a potential $10,000
net benefit through the subsidy.

for a potential $10,000
net benefit through the subsidy.

The final item on this

list is taxes are always bad.

Taxes.

Nobody loves paying taxes.

But I tell this to all clients

and I think it's really important
that we have a framework shift.

Taxes are the cost of extracting

profit from investments
that have been that have paid off.

That's just simply what they are.

If we remove the emotion from them,
I guess I should preface this.

I'm not telling anyone
not to optimize their taxes.

Everybody should figure out ways
to keep as much of the money

that they have earned
because you've already paying

the government a tremendous amount,
I'm sure, and I feel the same.

I don't want to pay the government
any more than I legally have to.

But taxes are the cost

of extracting profit from investments
that have gone well and paid off.

If we choose not to live our life because

we're afraid of taxes, you'll end up
regretting it at the end of your life.

Having a big pile of money
that you never spent

or that you were scared to spend
because you didn't understand this concept

that taxes are the price
of making good financial decisions.

That's all I'll say about it.

There are there are plenty of ways

to optimize taxes,
but you should not live in fear

of spending the money and the wealth
you have accumulated.

If it's prudent and appropriate to do so
because you're afraid

of incurring a tax liability,
you just have to do your calculations,

as with anything else in retirement,
and make sure that you understand how much

the tax will affect your probability
of success or your cash flows.

Simple as that.

As I'm rounding up this this topic,
I hope that the takeaway here is

As I'm rounding up this this topic,
I hope that the takeaway here is

we want to shift from a
place of retirement planning

that is based on...

retirement planning
based on fear

to retirement planning
based on fun.

Instead of thinking
what are all the constraints

I have, let's think of what is the best
or maximum amount I can spend,

What's the most fun I can possibly have
and still meet my legacy goals?

I hope going through the items
in this video helps you consider that.

I encourage
anyone who's been a great saver

and is proud of themselves for thinking

that they've been a great saver
but is feeling constrained

or uncomfortable figuring out how to shift
from saving to spending as they move

into retirement to think in this manner
and adjust the mindset.

I really, really appreciate
you spending your time listening to this.

I know it's kind of a

touchy feely, you know, a feel good
subject, but,

you know, my belief is that each
financial planners job is to help

you know, my belief is that each
financial planners job is to help

their clients maximize their satisfaction
out of their wealth.

Whether that's spending the most they can
or leaving the most of their heirs

is to be determined
based on what the client says.

But I have a tremendous amount of fun
helping people figure out

what's the maximum they can spend
so they can maximize their satisfaction.

That just happens
to be a personal preference of mine.

Anyhow, a last call out here.

If you enjoyed the podcast

and you have suggestions for future
topics, please leave them in the comments.

Also, please leave a review on Spotify or
Apple Podcasts wherever you're listening,

if you did enjoy this podcast.

Thank you as always for your time and
attention and see you soon.