I'll tell you, just like flying across the country and making sure that we've prepped for our fuel, we want to make sure that people have prepped appropriately further spending in retirement. Welcome to Keenan Retirement, a show dedicated to helping you thrive before and during your retirement years. If you are looking to grow and protect your wealth and want to make the second half of your life the best half, then listen in as well as advisor Bill Keenan and his host sort through the key issues that you need to know in a lively and candid way. Hey, everybody.
Welcome back to Keenan Retirement. I'm your co-host, Steve Sandeski, and this is the podcast where we talk about how you can thrive before and during your retirement years. And I'm here with Bill Keenan and Matt Wilson. Hey guys, how are things today?
We're doing good here, Steve. How are you doing today? It's been right at all weekend here and now we're starting to see some blue sky out there. So we're very grateful.
Yeah, well, it's definitely wet and cold here and we've got the camera going here so we can see each other and you said, I've got my rugged look on today. So I've got a sweater and long sleeve shirt. It's kind of like winter up here. Well, I think I'd go back out to California where we were a few weeks ago.
Don't you, Steve? Yeah, that was nice for sure. I was just talking to my daughter last night out in Charlotte, North Carolina. They were in the mid 80s.
So it's summertime. That's a lot of fuel. Yeah, that sounds interesting, doesn't it? That sounds like a title you came up with, Bill.
Oh, really? Why would you say that? Because I know how much you love to fly. So I came prepared today.
I got a couple trivia questions here about flying to get us started here before we jump into the topic about spending patterns and habits and safe withdrawal rates and dealing with clients who are trying to make sure that they're in alignment with their spending patterns and their income. Hopefully I'm well prepared. I make a good showing here on your aviation related questions. Okay.
Well, here's the first one. When you are sitting in a commercial airplane, you're sitting next to the window, you may have noticed that there are oftentimes is a little dinky hole in the window. The question is, why do airplane windows have a dinky little hole in them? So the first thing that I thought when you said that was, I thought you were saying that the windows themselves were a little dinky.
Well, they are that too. Yeah. Okay. So there's a tiny little hole in the airplane windows.
Matt, would you like to try this, sir? A tiny hole in the windows. And I'm guessing it's not a manufacturer's defect if it's in all the windows. Hmm.
I would have to say it makes me think something happening to do with the cabin pressure, but I don't know specifically what it would be for. There you go. You got that one, right? Yeah.
It gave me there because I was going to come out of the shoes probably with not a lot of an answer on that first question. Yeah. Kind of a shot in the dark there. Yeah.
So the hole is necessary to regulate cabin pressure because airplane windows are made up of multiple panels. So the hole helps the middle panel from becoming stressed with pressure during flight. All right. Here's another good one.
What are the white trails that planes leave in the sky? There's some conspiracy theories on this. Right. Don't go into that.
Gosh, my guess it has something to do with the fuel they're burning off, but I don't know the science behind it. That's called the contrail, Steve. Yes. That is a thank you.
All right. Excellent. And the fact is that that's not directly behind the airplane. There's always a gap between the contrail and where the airplane actually is located.
You didn't get me on that one. Thank you very much. Awesome. Awesome.
Very good. There are listeners who are excited about our games today. They are interested. That's right.
Well great. Well, Bill, why don't you introduce our topic today? I know this is another important episode that we want to talk about with the spending patterns and habits. In the past, we've talked about our financial planning process because the financial planning process is where everything starts.
So one of the inputs to the financial plan is how much do we need now to live on, to thrive, to prosper? How much do we need to pay our bills to really cover the basics? And then what do we need to have a good time, to have margin in our plan? And so we wanted to devote an entire episode to that today to give our listeners some perspective.
And for the many clients that we have that listen to our episodes, they've been through this process multiple times with us, but it's always good to revisit a spending plan, what makes sense and share with our listeners just some of our experience about all aspects to this as we move forward. Steve, I wanted to ask you something. I mentioned it earlier, but if I was coming from Milwaukee down to Kansas City and you were going to board the plane with me, which you've agreed to do at some point here in the near future, and I told you that I did the pre-flight, but I didn't worry about the fuel in the airplane this time. I was just going to guess this time, would you feel comfortable with that?
I'd say you're flying solo-bill. Well, when we're doing flight planning, one of the key things, pre-flight work and flight planning, one of the most important things is to make sure that we have the fuel covered for the trip. Of course, it seems just obvious in aviation as well, we have fuel minimums that are required, reserve requirements that are based on what wind we're flying, what time of day, and whether we're VFR or IFR, flying into the clouds, how much we have to have left in minutes of fuel when we get to our destination, and then even alternate destinations in case our airport that we're headed to happens to be closed for some reason. Just like that is the financial plan.
I think about a pool of assets that someone has, a life expectancy, the spending that needs to happen. The question is, do we have enough resources to get to our destination? Or are we just hoping that we get up in the air and that we catch that tailwind that may or may not be there and we make it to our destination by happenstance luck or by chance? I'll tell you, just like flying across the country and making sure that we've prepped for our fuel, we want to make sure that people have prepped appropriately for their spending in retirement.
One of the places that we start with this is where, quote, experts say are safe withdrawal levels. The gentleman by the name of William Bingen was the first to bring this out and he says that a diversified portfolio with a 4% withdrawal rate. If you think about a million dollars, but in this perspective, that would be 40,000 a year, I mean, off that million dollars to live on. And in his case, the research that he had done, he had determined that that was a quote, safe withdrawal rate, assuming that you increase that 40,000 per year over the course of a 30 year life expectancy for inflation.
And he said in nearly every scenario, someone taking 4% out, there still would have been money at the end of the 30 years. What we've determined is that one, they don't just spend in a straight line. So they don't start out spending one amount in their life and continue that same spending path for the rest of their life. There are fits and starts and increases and decreases around their spending that we, in reality, need to plan for.
Yeah, it's interesting. You know, that research, it was 4% a year adjusted for inflation for the next 30 years. So that plan is assuming that you're increasing your spending year over year and it's compounding over time. And what we found is that spending over time tends to be either flat or actually goes down.
So there's more upfront, but then in the later years in life, spending actually decreases. And so that's a much different outcome than the compounding of the 4% a year that Mr. Bingen described it. Yeah.
So you could you imagine, Steve, you retire and you're, let's say you're in your 60s, you're not going to retire anytime soon on, I'm sorry, Steve. Not planning on it. Right. Good.
Neither is my wife. I know podcasting isn't a very stressful job. We're getting good reviews with your help here. So like, like golf, I can podcast well into my 70s.
Perfect. So all right. Could you imagine retiring, let's say in your 60s and you're moving around more, you're active, you're traveling, you're doing things, you're checking off items on the bucket list, so to speak, that costs money. And so naturally, you think I will spend more at that point in my life.
And then when I get out into my early 80s, the odds are you'll probably be spending less and it's not because you have to, it's by design and by desire to be closer to home and to be less active. You see and plan for at least at the end of life. So typically the last three to five years, possibly a long-term care expense kicking up, really to a point where you have to make some plans and considerations for it. Yeah, JP Morgan, so they came out with some data.
They looked at and analyzed their customers in the bank, their credit card debit card, so they're kind of banking and financial patterns. And they have some numbers. Now I haven't seen this in practice with this dramatic, but that spending decreases by about 30% from somebody in their 60s to when they reach their early 80s. That's data that they've got based on a large swath of customers to support that.
And I see people not necessarily decreasing at that significantly, but what I find is that the compounding of the inflation adjustment, which we plan for, it's not as significant or as necessary on an annual basis. People aren't taking those. To Matt's point, if you have a one or two percent inflation rate actually in your spending, as opposed to a three percent inflation rate, that dramatically changes the probability of success of a plan. Again, we always like to plan conservatively, but we're just sharing today what we've experienced in the real world.
And at this 25 years, and I've got to see plenty of folks retire and literally get used to and settled into a spending level. And then really, it might be because of the nature of our client base, we deal with a lot of engineers, we do a lot of people who've lived within their means in their lifetime. So they get settled into a spending pattern and they're not calling us up asking us for their inflation adjustment every year. It could be partly that.
Yeah, certain expenses tend to go down. Like we see insurance premiums, so not health insurance, but life insurance premiums, disability insurance, automobile insurance, those become less and less of a cost as you age. Transportation, that's right. I mean, travel, you're probably not going on as many.
Trips and depending on where your kids are located, that factor's in even transportation where families will transition from two cars down to one. So you save a lot of money on that. I think it's important though, that we talk about folks that start out with this in mind, start out wanting to spend more upfront than they know is sustainable. So when folks get to us and they get to this point where they're going to be spending, the red light starts to go off in our minds when they get above about 5% withdrawal rate and they want to sustain that for too long.
Because we know that if we buy a 10-year treasury today, what's it paying now? 2.5% still for a 10-year treasury? Yeah, maybe even less, 2.3 I think. And the bank CDs are still at 1% or so.
So almost it's a non-choice choice to have a diversified portfolio of fixed income and equities in a retirement account to make sure that money lasts for 30 plus years. And in that scenario, there is volatility. And so when someone's looking to spend more than about 5% of the total, we start to say, okay, how long do we have to do that for? And is this going to be sustainable?
And does the clients understand that at some point there may need to be an adjustment downward? So that's something that we see if someone is pre-62, before Social Security has kicked in, and maybe their decision is not to take Social Security till later, but 62 is the earliest, and they make a conscious decision through planning to spend down their assets before Social Security kicks in. And maybe they're spending 6%, 8%, 10% of their asset base for a few years only as a bridge. And then when Social Security kicks in, the plan is to reduce their spending by what Social Security is.
And then they get out to Medicare, of course, and hopefully premiums are a little bit lower than the self-insurance that has to happen on the exchanges too, pre-Medicare. But where we see people get in trouble is when we've made that plan and then Social Security kicks in, and they don't reduce their spending. So it's going to be a big deal, can it? I mean, it's significant.
It is. I mean, especially that's why we do so much work up front on those plans about, okay, we're going to structure the spending in such a way that it'll come out of the assets first, your asset base, and then when Social Security kicks in, here's what's going to be reduced by on the asset spending, which in some cases allows it to grow again, because now we've got the distribution need in an acceptable range as a percentage of the total. But in the cases where those spending amounts, the percentage of the total gets up high, as Bill mentioned, the volatility of the investments has such a huge impact in someone's result. If that person started, hindsight's always 20, 20, and we knew they started at the best time possible, it might have worked.
But considering that we don't know the future and we don't know what's going to happen, that's why we talk about that 4%, which are already as a back of the napkin and then putting it in a real plan that does adjust for things happening. We've done this in many cases where we show structured spending throughout the life of the plan. So it's a base spending amount plus additional spending for travel or for a charitable contribution or gifts to grandkids. But those are structured additional expenses that have a finite period to them.
And we can list them as not necessarily needs where we have to have them, but we can list them as what we call once and wishes. And we can talk about, hey, if we hit a rough patch, we might have to talk about adjusting some of these outside of the base spending items here so that we make sure your base spending is covered. And you can really relate to that. Well, guys, I got a question here.
So we've been talking about how much income a client can pull from their assets in retirement. What about the sequence of returns on their portfolio? For example, let's say someone retires on July 1 and over the course of the next 12 months, the financial markets dropped 20%. So that's kind of one scenario.
So at the start of their retirement, the market takes a drop. And then the next scenario would be 15 years into retirement, the market takes the drop. How do you deal with that sequence of returns and the impact on how much money they can withdraw? We deal with a lot of smart people and many of them come in with a spreadsheet already pre-planned out for the next 30 years.
And it's based on an average return, let's say it's 6%, 7%, some number like that. And they say, okay, I'm going to make 6% of my investments. I'm going to spend 4%. Well, we've seen these spreadsheets.
They work indefinitely because you're making more than you're spending every year. And it's a linear rate of return. And the reality is we know returns don't come in that order. They come in some sort of volatility around them.
And depending on the type of investment determines how volatile it is. So we've got to have an investment strategy that can account for that. We like to set aside a specific number of years for someone's income needs so that when we do hit those volatile periods, we don't have to sell investments at a bad time. We'll live off the more conservative piece or the more stable piece during the volatile times.
And then when markets are up, when those investments rebound, then we can replenish and start doing a systematic withdrawal out of that basket too. So there's a couple of things that you have to do. When you're taking money out of a portfolio, that's a domestic point. You've got to have money outside the market.
What do you want to do? Get caught short, need money back at a bad time or two, have an emotional reaction to what you're experiencing in the market, what you're seeing on the statements and what you're seeing on the news for that fact. So it's so important to think these things through first so that both spouses, if there's a married couple, are on the same page, they understand what they're doing and why. And they're able to increase the odds of getting through it.
Not just hoping that we get a tailwind at some point and it gets us to our destination, but truly having a plan in place. Bill and Matt, you guys both know. Hope is not a strategy. That is right.
Hope is not a strategy. I said this, I think last episode, but this is apropos for this one. We can't wing this stuff, guys. That's right.
But it's true. We can't wing it. There's no reason to. That's the reality of it.
There's just no reason to because you can get out ahead of these things and think through them. Matt, I wanted to throw one more thing at Steve here too. And that's the person that comes into the firm and says, guys, I hear what you're saying and I've googled it, safe withdrawal rates on Google and I see it what they're saying. They're saying 4%, 5%, maybe in some cases, but I want to spend 10% of the total and I want to do it in perpetuity because I see the markets here have returned 10 to 10% a year for the last 100 years.
And I spend 10% of my total. If the market makes 10%, why can't I spend 10? What are you guys talking about 4% or 5% of your withdrawals? Why should I spend 10?
And you guys should be able to, if you're good investment managers, just make more money for me. Be more aggressive. What do you have to say about that? Steve, were you going to ask us to do that for you?
Well, there's a problem with that, isn't there? I could see the logic where someone would come to that conclusion. They'd say, hey, the markets have returned this and I should be able to spend pretty close to what the markets have returned, essentially living on the gain every year. But just to what we talked about with the order of returns, it's the same concept, the volatility of that return, it doesn't come in a straight line.
So, when you're invested more aggressively, you actually have increased the odds of something bad happening. So, it's almost counterintuitive. You would think, hey, if I'm going to be more aggressive, I'm going to have more money to spend later. But if you need money now and you need to generate income out of that, which might be a combination of dividends and interest, but then you might have to sell some of the investment to live on it.
That's what we call a counting on capital appreciation. And in some years when the market's down, now you're selling more shares. If you're more aggressive, you're selling more shares to generate the same amount of income. So, those shares aren't there to rebound.
That's right. And I look at this and I say, contingency fuel. This is what we call it when you're designing a flight plan and it says, which shall be the amount of fuel required to compensate for unforeseen factors. And we apply that same concept here.
What happens if we go through another 0102? What happens if we go through another 0109? You hear Matt and I talk in our episodes and we believe in the US, we believe in the power of the great companies here and around the world and the wealth that can be created and harvested from these accounts, not only from people starting out, but people that are in retirement that need to have growth in their portfolios for some position. But we have to always have a contingency plan for the times where we go through things like 0102, 0109 and not be forced to sell things at a bad time.
And that then precludes us from having someone invested past the point where they have five to 10 years or so of their income needs set aside, including dividends and interest that come in as well. We just can't. And we won't. Here in our firm, we wouldn't accept an account like that if somebody asked us to do it because it's not a matter of if, but when that situation blows up, the next deep market correction, we see if someone's pulling out 8 to 10% of the total or more and we go through a substantial correction and they're mostly equities.
That account will go down, which draws will continue. To Matt's point, it will never rebound. Yeah, it's such a big deal. And here's the kicker to that too.
We know we're going to go through a market correction. There's going to be recessions and we all are going to experience the business cycle here. And so we can actually, if we have enough set aside, we use those funds, not a lot of it, but a little bit of it actually to buy things with. We can take advantage of those pullbacks and those corrections and use them as opportunities where we balance.
So guys, if I had to summarize what you've talked about here today, I'd say that first we need to come up with a withdrawal rate that makes sense. Historically, some of the data shows maybe 4% a good number, maybe 3.5, maybe 4.5, but it has to be personalized to that client based on what their savings is and what they plan on spending and how they want to live. So we need to have a contingency plan. So just like on a flight, you need to make sure that you've got enough fuel in there to account for the fact that there may be some bad weather.
You may have to circle around a while before you can land. You may have to land at a different airport. So you want to have some extra fuel in the tank there to make sure that you don't run out in case something happens unexpected. Third would be you want to be able to get small, if necessary, and live on less than what you were planning on living.
Again, in case there's some type of unexpected situation. Fourth would be that some people live well below their means and could actually spend more. And sometimes they just need someone to say, hey, you're doing great. You've got plenty of contingency.
So if you want to take a big family trip or you want to do something that would be, gosh, wouldn't that just be awesome? You've got the money to do that and your financial advisor can let you know we've run the numbers. You're in pretty good shape. So by all means go do that.
So there's four things. Anything else that I may have missed that you want to add here to the summary for today's program? You know, Steve, in most cases, number four is the reality of what we're dealing with. It's most people have lived within their means over a lifetime and they understand the power of process and planning and this spending concept we talked about today.
It's us helping them find the balance like we said earlier. There are many things that come in and out of play over the course of a lifetime. Things we can't even plan for today. New grandchildren, many things that happen.
Maybe someone finds a passion late in life that involves a lot of their attention or they find a cherry or something close to their heart. So it's one of these things I've said it early and we continue to say it. The client in the situation has got to be nimble and in a good quality fiduciary financial advisory firm that sits across the table as a personal relationship that got to be able to be nimble with that client as well. Hopefully we've given you a few things today to think about if you're considering retirement or you're in retirement and you have a spending plan in place or even don't have a spending plan in place to say I'm going to get off the sidelines and stop listening and I'm going to take some action and get something in place to make sure I'm secure in my family taking care of.
Excellent. That's a great group of clients and King wealth advisors that are living below their means. I mean that's ideal and just shows that the folks that you're working with are really thoughtful and conscious about how they earn their money and how they spend their money and how they save their money. So that's just fantastic.
So hey guys, great show. Thanks for taking the time and sharing your wisdom here and we'll look forward to getting together on the next episode. All right. Thank you Steve.
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