The Year You Retire

The year you retire is certainly one of the most exciting times of your life, but it is also one of the times when we are, financially speaking, the most vulnerable. But the good news is that with the right know-how, tools and planning, you can minimize your risks and vulnerabilities and focus your efforts on those things that will truly make your golden years truly golden. Join CERTIFIED FINANCIAL PLANNER™ professionals, John Bever and Jim Uren as they discuss the latest strategies to help make the year you retire your best year yet.

Ep. 1 - What's This Going to Cost Me?

Ep. 1 - What's This Going to Cost Me?

Episode 1: What’s This Going to Cost Me?

If you're feeling overwhelmed by the uncertainty of retirement expenses and struggling to find an accurate estimation, then you are not alone! Many individuals nearing retirement are taking generic approaches, relying on rough estimates or outdated advice, which often leads to financial unpreparedness and anxiety about the future. Instead of achieving the desired result of a clear understanding of retirement expenses, they find themselves stuck in a cycle of guesswork and worry. But fear not, there are proven methods available to help you accurately calculate your retirement expenses and achieve better financial preparedness.

In this episode, you will be able to:

  • Discover effective methods to calculate your retirement expenses, allowing you to create a realistic budget that aligns with your goals and aspirations.
  • Learn how to handle infrequent retirement expenses, such as medical emergencies or home repairs, without derailing your financial plan.
  • Understand the impact of inflation on your retirement finances and learn strategies to safeguard your savings against rising costs.
  • Explore smart ways to plan for unexpected retirement expenses so you can better handle any financial curveballs that may come your way.


The key moments in this episode are:

00:00:05 - Introduction
00:04:12 - Importance of Knowing Retirement Expenses
00:07:33 - Trivia Question and Confidence in Retirement Savings
00:08:32 – Problems with Underestimating Expenses
00:08:42 - Client Example
00:13:51 - The Sniff Test
00:15:22 - Tracking Expenses for Accuracy
00:18:53 - Planning for Infrequent Expenses
00:21:25 - Inflation as a Retirement Robber
00:27:39 - Understanding the Decline in Consumption during Retirement
00:28:51 - Customizing Your Retirement Plan
00:29:40 - Estimating Expenses and Accounting for Inflation
00:30:02 - Spending Shocks in Retirement
00:34:57 - Importance of Getting Your Spending Number Right


Show Transcript:

Jim Uren: This is The Year You Retire podcast for people who want their first year of retirement to be right on the money. Your hosts are me, Jim Uren and John Bever, CERTIFIED FINANCIAL PLANNER™ professionals with Phase 3 Advisory Services. Retirement is one of the happiest times of life, but getting the most out of it requires you to be properly prepared.

Listen along as we explore the financial topics, tips, and strategies that will help you make your first year of retirement your best year yet. Now let's get planning.

Welcome to the very first episode of The Year You Retire podcast. Is one of your main goals in retirement to have enough income to cover all your expenses every year? If so, you're not alone.

But are you a hundred percent confident that you'll know exactly how much your expenses will be each year?  Because underestimating your expenses could very well jeopardize your retirement lifestyle. So today we're going to discuss three options or methods that you can use to help ensure you accurately calculate those expenses so that you'll be better prepared to maintain your current lifestyle throughout retirement.

But, before we tackle our main topic for today, since this is our very first podcast episode, we want to take a brief moment to just introduce you to your co-hosts for this podcast and share just a little bit of why our firm, which is called Phase 3 Advisory Services, decided to start a podcast.

So let's start by introducing you to the President and founder of our firm, John Bever, which is spelled B-E-V-E-R. John, would you just introduce yourself and tell us your favorite thing about being a financial advisor?

John Bever: Oh, this is great, Jim. I love doing this and looking forward to sharing with our clients and, and those that tune into the podcast to learn about these financial principles.

I've been doing this for over 40 years now, started the beginning of 1983 and it has been a wonderful journey. Actually couldn't have picked a better time to start. I had no idea at the time, but it turned out to just be a wonderful time in history in terms of the development of financial planning as a practice and becoming a well-recognized step that people need to take for their finances and being proactive.

I tell you what I really love about this, Jim, it's seeing clients reach their goals. The smiles on their faces, the peace that they're feeling, the things that they share.

And it’s kind of fun sitting in the seat because we get to vicariously experience that with the clients over and over again. You know, sending a kid off to college, which is both as you know, the letting go, but at the same time being able to achieve that and provide that for your child.

Also I'm thinking right now of a situation that went full cycle.  Both clients passed on, I'm dealing with the next generation. But what the next generation said is, “Boy, Mom and Dad were just always so comfortable. They knew that they had enough money. They were able to do the things that they love doing.” And the kids themselves said that the settlement process of the estate also just has gone so smoothly and that's because things were set up right. So I think that's the most rewarding part. And, it is something that happens day after day as we deal with clients.

Jim Uren: That's great. That's great. And my name is Jim Uren. I work with John. I'm also a CERTIFIED FINANCIAL PLANNER™ professional. I've been providing investment and financial guidance to clients for over 20 years now, hard to believe.

And what I think I like most about this profession, John, is helping people gain clarity, you know, in their financial decisions. If you're like most people, you know, there's just a lot of moving parts to your financial life and the process that we've developed over the years really helps, you know, really helps you gain clarity on all the pieces of that financial puzzle and really helps you organize and fit all those pieces together, you know, really in a way that makes the most sense for you and your particular needs and goals.  So that's, that's really what, what I love about this profession as well.

And the next question is, John, “Why in the world did we decide to start a podcast?” Now there's a number of reasons we had, but John, why don't you tell us why you're most excited about this podcast?

John Bever: Well this is going to help us better serve our clients in many ways.

The first thing is, you know, we've done media appearances, but they're very short. We can't get into much detail. So the first thing is we can provide much more detail than we can in a short media clip. And the part of that that's really helps the clients is that they can go back and listen to these podcasts over and over again.

You know, we might say something in a review that they want more information on. They can go find that.  We can point them to one of the podcasts that might answer that question.  Refresh their memory about something that we've talked about before. And, we can get into more detail than we can oftentimes get into in a review.  So I think it's going to really help us serve our clients better, provide good information, give them a resource that they can use on a regular basis.

Jim Uren: Yes, I would completely agree. You know, this is going to be an opportunity to serve clients because, like you said, sometimes there's a lot of material that comes up and we just don't have time in a typical meeting to cover everything we'd like to.

And of course, this just gives us the opportunity, as you alluded to, to provide helpful financial education to more people than we could ever work with one-on-one. And as you mentioned, John, I mean, we've been doing a lot of media appearances. Our clients probably know that.  In the last many years, I mean, we've done Daily Herod articles. We've been on WLS, WGN, WBBM. Those are all, you know, some of the biggest radio stations, news radio stations in Chicago. And, it's been fun, but what we found is it takes an awful lot of work to prepare for those for just a very short soundbite. And, it just wasn't, just wasn't delivering the value education wise that we would like.

And so that's why we just started, we decided to really focus on a podcast where we could really get into what we thought was the most helpful information to our clients. Not just necessarily, what's the latest and greatest and what's trending in the news. So, yeah, that's where we're at.

Let's hop into our topic. So today, you know, we're going to discuss, why it's important to know how much this retirement's going to cost you. Now, before we jump into that, we're going to cover, let me just say, actually, we're going to cover a few things. We're going to cover three methods that you can use to get an idea of your current expenses.  How you can handle some infrequent expenses.  We're going to discuss a little bit about estimating the effects of inflation.  And kind of cover some of the most common spending shocks in retirement. So you can answer your own question of, “How much money are we talking here?”  You know, “What am I going to need to retire?”

So first John, a trivia question. What percentage of Americans are “very”, or “somewhat confident” that they'll have enough money in retirement?  Is it 84%, 64% or 44%?

John Bever: Ooh, that is a really good question. I have an answer in mind. I'm going to wait a minute here for our listening audience to think about that. 84%, 64% or 44%?   I'm not sure, but I'm gonna tell you what my experience is. My experience is that it's probably about 44%. That's one of the reasons why people sit down with us, because they're not sure and they want to be sure. So Jim, what's the answer? What does the average American think?

Jim Uren: Well, the, the answer, according at least to the Retirement Confidence Survey conducted by the Employee Benefit Research Institute this year, and in coordination with the Greenwald Institute is actually 64%.

So about 64% of people say they're confident they'll have enough money in retirement. However, that number has actually decline over the years. So even last year, that was at 73%. And so the last time the number was actually this low was back in 2008 during the global financial crisis. But again, I think if we looked at probably those 64% of people, we would probably agree John, that a good chunk of those actually are not as prepared as they would think.  They're at a much higher risk for running out of money in retirement than they realize.

So, why don't we talk a little bit too, John, before we jump into how we estimate, why is it so important that you have a good handle on what your actual expenses are going to be in retirement?

John Bever: Well, Jim, you just mentioned it. And that is that probably most people overestimate their preparedness for retirement.  And one of the reasons is, is that they underestimate their expenses.

I was just sitting down with a client yesterday and we were talking about their expenses because they’ve gone through a job loss and they're working through a transition. Retirement is just a few years down the road. Parents have had to move in with them. There are just a lot of things are moving around. And as we talked about their spending, they said, “You know what? We're in this new house. We're not really sure what the spending is,” because they haven't had time to track it. And so they said what they thought it was. And when we actually worked through the numbers, we found that they were spending more than they realized.

We encountered this regularly.  In fact, I would say that's probably one of the most frequent issues that we bump into as we work on retirement.  And why this is so important is because if you underestimate, you can't go back and fix this. Right. Retirement, it's kind of a one and done type thing. If you're still working, you can adjust your expenses to your changing income.  You can work to increase your income. Once you've retired, you're on some fixed expenses. And if you're on a fixed income, the only thing that you can do is change your expenses. So if you've underestimated, you may have to cut some very important things from your lifestyle. And that's why this is so important.  We don't want people to outlive their resources.

Jim Uren: Absolutely. And I think in our experience and from the research, you know, we focus a lot in our industry on, you know, an investment portfolio and rates of return.  And all of that's very important, but I think in experience, what tends to sink a retirement plan more often than lower rates of return than expected is actually higher expenses than expected. And so that's why it's so important. I say, that's what keeps me up at night when I worry about clients. It's the potential of overspending much more so than it is rough markets. Cause we will have rough markets.  They will come and go, but it's that overspending, like you said, John, that can really get you into trouble.

So, we're going to look at kind of three ways that you can create your overall budget or spending plan for retirement, just to kind of give you a sense of what that might be. Now, the first, the first strategy is just simply what we call a replacement ratio.

So typical retirement income replacement ratios vary.  They're often cited somewhere between maybe 70 to 85% of your pre-retirement income. It can vary greatly. In a paper in 2013 titled, “Estimating the True Cost of Retirement,” David Blanchett, who was at that time, the head of the retirement research at Morningstar Investment Management, he found a much wider range for replacement ratios than what is often cited.  His range was somewhere between 54 and 87%.

You know, typically, the higher one's income, the lower the replacement ratio.  Because if you're in a pretty high income, you're likely, in those pre-retirement years, setting aside a larger portion of that income for retirement.  And a good chunk of that is also going to taxes. So you may be able to replace a smaller part of your income.

So again, the replacement ratio is just taking whatever your gross income is and saying, “Hey, if I can get 60% or 70% or 85% of that in retirement, that should cover my expenses. And that is one approach to estimating your retirement expenses. John, what are the pros and cons of that particular approach?

John Bever: Well, the pro is that this is the easiest way to get to that number. Because people know what their income is. we just apply a percentage and we got a number to work with. And that is particularly helpful for people that don't track their expenses and really don't have a good handle on what their expenses are.

So it gives us a starting place and that's great. So it's very easy. However, the cons are it's easy, but it's not accurate. As you mentioned, there's a wide variance in what that answer might be. In fact, I think of a couple of cases where people actually retired spending more in retirement because now they had free time.

The house expenses were the same. They ate the same amount of food, but they ended up eating out more and doing more fun things, which is great. And so we were able to plan for that, but that's really important to not use a percent in that particular case. So again, it's easy, but it may not be that accurate.

Jim Uren: Yes, very well said.  It at least gives you an estimate to start off.  But probably not the best way, the most confident way to enter retirement. So let's talk about the second option. And sometimes we'll use this to give us a little bit of a better handle on things, John. But we call it the subtraction method.

And that just simply means we basically start with your salary. We'll take a look at your W-2, or your paystub, or your taxes. We'll then back out what you paid in taxes to the government. We’ll back out any savings you set aside and any debt payments you made. So in other words, taxes, savings, and debt payments.  If it didn't go into one of those three buckets, it was money that you spent.

And so, that's kind of how we'll approach it. We'll get a sense of, okay, we know now we can subtract those three items, everything else went out somewhere to cover some sort of expense. John, pros and cons of the subtraction method.

John Bever: The pro is that it gets more accurate because it's based on the reality of what they're actually spending without breaking out into all the categories.

So that's a pro. In fact, this is what I call the sniff test, right? So many times before we're getting into the plan, as we're trying to figure out the data, we'll actually work through that calculation in that meeting and get to a bottom line and say, “Well, this is actually what you're spending.”

And many times people go, “We didn't realize it was that much.”  Especially if we start with how much do you think you spend a month, they'll come up with a number. When we actually back into it using the sniff test, we come up with, oftentimes, a larger number. The con is that it doesn't account for things that change in retirement.

So it's based on what they're spending today, but what they're spending today may be different than what they're spending in retirement. As I mentioned, those clients that have some hobbies or some things that they want to do in retirement, maybe taking some big trips, maybe spending more time with grandkids, giving gifts, whatever that might be, that might not be accounted for.

So again, it's a little bit more accurate. As a stiff test, it gets us to a number fairly quickly, but the con is it doesn't account for those out-of-line expenses, unexpected expenses, things that will change in retirement.

Jim Uren: Absolutely. And I do like this approach when we at least need a quick number because it is accurate in the aggregate, right?

In terms of what was totally spent this year. But as you alluded to, it doesn't quite give us the full picture because it may not include things that you'll need to spend in retirement. And it may include things you won't need to spend in retirement. And so it's an improvement, certainly over the replacement ratio, but it still doesn't quite get us there.

And that really brings us to option three. And we just call this, actually tracking expenses. So, whether you use a Quicken program or a spreadsheet or another software, there's a lot of good ones out there, this is another way to really probably get the best handle on what your expenses currently are.  Which then helps us to better estimate what they may be in retirement.  John, pros and cons of this particular approach.

John Bever: The pro of this approach is it's very accurate. And we can find those budget busters in the budget when we get down to this kind of detail.  I'm thinking of actually one of my very first clients and they had a good income. It was very comfortable living for them.  We're doing some projections and I tell you, the sniff test didn't work out. Something was missing. Something wasn't quite right. So we had them track their expenses. And what we found out was they ate out a ton. They had a very busy lifestyle. They were on the road a lot with their business and they just stayed out because it was convenient and that was the budget buster for them.

So it's very good in that it's accurate. The con is it takes time and some clients find that, boy, this is just, I have to track every expense. We try and find some ways to make it a little bit easier. That con, however, is really, really important because when we get down to the nitty gritty of each category, again, we can figure out which categories might go away in retirement.  Which categories might increase in retirement and come up with a very accurate spending plan for them in retirement.

We're going to cover some of the ways to track spending in a future podcast, so don't let that tracking freak you out. There are some easy ways to do that.

Jim Uren: Yes. And it is very helpful. Like the example you gave John.  It may be fine for someone if they're spending more on eating out right now.  But that may be something they could more confidently assume they're going to not spend as much on once they're retired and not having to have such a busy schedule.

So that’s a good example. But yes, this is challenging and some people are more natural at it than others. We have used quicken as a family for years and I can't really take credit for that. That's really my wife who was an accounting major in college and makes sure I turn in every receipt, etcetera.

But that's a big help. As we plan expenses, because even pre-retirement, those expenses can change, right? All of a sudden you need to come up with money for braces for the kids or camp or whatever, and you've got to be able to pull those numbers out. It's very helpful. And I know what we love to see, in an ideal world; we want to see someone living on their retirement budget before they retire. Right?

I mean, it's one thing to say, I'll live on, you know, X number of dollars, but if you're going to spend, you know, twenty or thirty grand more than that every year until retirement, it's hard to believe that you're going to be able to cut back that much.  And so we'd love to see not only that those expenses tracked, but then see people stick to those, those numbers.

John Bever: Yeah. That year before you retire is a really key time to try that out.  Try out that budget and make sure that it's actually going to be something that they're going to enjoy and be able to do.

Jim Uren: Absolutely. Because then that gives you confidence for the year you retire, which is, of course, what this podcast is focused on, and that is a big help that gives you a lot more confidence going into that retirement. So those are some three methods that all have pros and cons. 

But one of the hard parts, of course, in retirement, John is planning for those infrequent retirement expenses.  So, you know, in addition to kind of those general ones, we all know we're going to have certain bills every month, whether it's property taxes or health insurance, et cetera, certainly food. You also need a plan for those expenses that may not even occur every year. So examples might include buying a car.  Or, maybe, as you mentioned, John, a dream vacation that you want to do once, twice, or three times in retirement.

And of course, one way to handle this is just simply to boost your annual income number, right? So if you figure out what your expenses are going to be, maybe add five or ten thousand dollars to that, just to give you some room. That of course can be a bit clunky. And it may also require you saving some money during retirement to save up for a particular purchase.

You know, sometimes people don't think about it, but in retirement, sometimes we are having people save out of the income that they're getting for particular goals. How do we then as advisors, John, account for this? I mean, we've got some pretty sophisticated software that helps us, but what is, you know, what are some of the approaches that you take with clients to help prepare for these unexpected, or I should say more infrequent expenses?

John Bever: Yeah. Well, one of the ways is all of our experience. We have lived retirement many, many times over with our clients.  Literally hundreds of retirements. So we've been able to experience those expenses as clients have come up with them. And a big one is obviously health care costs and not just an unexpected procedure, but the increase in the premiums themselves.

You know, Medicare premiums go up, Medicare supplement premiums go up. And so, it's that experience that has probably been the biggest thing. Plus we also do reading on this, but the last thing is knowing the client.  As we get to know our clients very well, we can begin to anticipate what might be going on.

For example, those clients that are very healthy versus those that aren't healthy.  Those that actually like to replace a car very frequently versus those that like to run it till it actually dies and they're pushing it to the junkyard. So that's another way that we figure these out is by understanding human behavior and knowing our clients really well.

Jim Uren: Absolutely. And we do have the advantages, as I mentioned, we've got some sophisticated software that can help us plan for some of these infrequent expenses that we know are going to happen.  Like a new car purchase, right? We can put that in our software as a goal for every, maybe every six years or eight years or 10 years we'll replace a car.  And so we can  account for that which is certainly nice.

Let's talk about something else though, that can be a problem in retirement.  Sometimes we call it a retirement robber, so to speak, and that's inflation. And of course, inflation is where the cost of goods and services go up.

So a more official definition I got from McKinsey & Company's website, and they explain that, “Inflation refers to a broad rise in the prices of goods and services across the economy,” which, of course, erodes “purchasing power for both consumers and business.” So that's a little bit more official one.

This one might hit a little closer to home. “Inflation is really when you pay $15 for the $10 haircut you used to get for $5 when you had hair.” That, of course, is from Sam Ewing, an American humorist, and I kind of like that one a little bit better. But according to the Bureau of Labor Statistics, inflation has averaged, and again, average is the key word, about 3% percent a year over the past 100 years.  But as we've seen even lately, right, the last year and a half here, it can vary greatly. I mean, it can be very little or it can be a lot as we've experienced recently. 

So John, maybe chat just real quick about why we need to make sure we're accounting for inflation in retirement when we do these projections for people.

John Bever: Yeah, it's this robber, as you mentioned, and there's a really interesting rule called the rule of 72.

If you're not familiar with it, this is how it works. If you want to figure out how long it takes money to double, then all you need to know is the interest rate. And you take the number 72 and you divide that by the interest rate, and it will give you the time it takes for that money to double. Well, it's also helpful for inflation, because what works to grow money when you're investing actually works to reduce the value with inflation.

So if we take 72 divided by 2, if we had 2 percent inflation, we end up with 36. So with 2 percent inflation, money will double every 36 years. Put another way, inflation will cause the cost of goods to double every 36 years. That's not too bad, 2% inflation.

Oh, but what if we increase that? What if we go to 8 % inflation? Ouch. At 8% inflation money's going to double every nine years. Almost 10 years. In fact, 72 divided by 10 is 7. 2. Well, when did we experience 7% inflation? That was the 1970s. We might be seeing that again. We're not sure. But that's brutal. Think about that.  Every 10 years, you have to double your income just to make ends meet.

So that's a critical thing, and that's why inflation is so difficult. And it's insidious, even at 3 and 4%, what that does to push up the cost of goods. And inflation is one of the three big blocks that people experience with their financial plans.  It's taxes, procrastination and inflation. So this inflation robber is really important to address in the financial plan and to get a reasonable number as our assumption going forward.

Jim Uren: Yes, and it is a big factor, but there is, there is a little bit of good news.

The bad news is that the things that retirees tend to spend money on actually tend to increase at a pace faster than general inflation.  So on the one hand, those who are retired, the things they spend money on tend to actually go up even faster than normal inflation.

What is interesting though, of course, is that general economic theory would postulate that we ought to pretty much want to spend the same amount of money every year.  That is, we should want to consume the same amount of goods and services consistently throughout our lifetime. The academics call it the life cycle hypothesis of consumption. So that would certainly predict we consume the same amount [every year].

However, what's interesting is that when we look at the actual empirical research, and again, I'll cite a paper by David Blanchett, it suggests that spending actually, I should say, consumption tends to decrease by about 1% in real terms each year in retirement.

And when we say real terms, what we mean is adjusted for inflation. So for example, let's say that inflation has been 4% a year for the past 20 years. Based on this research, what we would expect to find is that retirees would've been increasing their spending, not by the 4%, by about, but by about 3%. And so what tends to happen in retirement is consumption does not, and again, this is on average and it can vary, but it does not to actually keep pace with inflation.  And this this particular study also looked at households with varying levels of net worth to see if the same tendency to decrease spending in real terms throughout retirement held true for both low and high net worth households. And generally speaking, it did.

So, some of the implications is that in most cases, retirees do tend to decrease their consumption in retirement. So, it may be appropriate to use an inflation assumption in your retirement plan that is a little bit less than your actual assumed rate of inflation. Certainly, assuming a normal rate of inflation just gives you a little bit more wiggle room if things don't go well.

But like we mentioned already, if inflation averaged 3% a year, you theoretically could assume 2%.  Or, we like to often assume inflation is going to be 4 %, again, just to give us some extra padding. And so maybe you're comfortable with a 3% inflation rate.

But the good news is, as you retire, most people don't tend to keep their consumption up. Now, and this ironically tends to be the case, even though medical expenses tend to be, tend to take up a larger portion of one's budget. So that is certainly an issue.

But then that brings up another topic that researchers have identified similar to this, and that's the concept of the retirement smile. And so that retirement smile, if you think about a smile, it tends to go down. And again, what we've just talked about is that tendency for consumption to actually be declining over time throughout retirement. But what can cause that smile to go up at the end? It can be, a lot of it, usually is medical expenses, particularly long term care.

So, although retirees’ consumption can go down towards the end of life, those expenses can skyrocket when you start to have large health issues and particularly long term care, which is can annihilate a financial plan.

John Bever: So what you're saying is if you draw a smile, you start off on the high side, you go towards the middle, the line goes down, and then you get to the other side, the line goes back up in order to draw a smile.

So in retirement, expenses may decrease for a while, but then they increase at the end of life.

Jim Uren: Exactly. Exactly. And of course they don't necessarily for everybody, but that's a pretty common tendency in retirement. But again, this is where ideally you don't want your retirement plan to be based on averages, right?  You want it to really fit who you are and what your particular goals are. And that's really important. And that's what, of course, we would help clients do.

John Bever: Well, anecdotally, I can attest to that. I'm thinking about my parents, in the early years of retirement, they were in good health. They were robust.  They were traveling a lot and spending actually more money in the first few years of retirement than they were spending before they retired. But then over time as they aged, I remember the day when my dad said, “You know what, we're not going to be flying anymore. We're just, we're just done with that.”

So no more long trips. And then they stopped taking longer driving trips. And then they ate less. And so that really did happen. And even there where they lived, they moved to a smaller place. And so it really did dip for them. But then at the end, there were the end of life costs and some of the care that both of them needed to pay for.

Jim Uren: And that's gets us kind of into our final topic here. So we've talked about methods of estimating your expenses in retirement. We talked about needing to make sure that you would also account for those expected, but infrequent expenses like car purchases. We talked about inflation, how you need to make sure your numbers account for inflation.

But there's also something that economists and financial advisors, we call spending shocks in retirement. So these are the semi-unexpected expenses that we don't tend to plan for. The research [shows], and certainly I think John and I would attest to this, some of the most common spending shocks in retirement that often aren't accounted for in a typical budget include home repairs, dental expenses, helping adult children (which is becoming even more of an issue), long term care expenses (which we just discussed) and the premature death of a spouse.

All of those things can really totally change one's financial expenses and financial situation in retirement.  John, you've certainly seen your share of these spending shocks when you've worked with clients over the years.  What are some of the ones that you've seen the most often come up that just were a kind of surprise to a lot of people?

John Bever: Yeah. And I'm glad you mentioned clients because personally I've seen those spending shocks too, right? So, but let's focus on the clients. Yes,

Jim Uren: This is true.

John Bever: Home repairs always. And one of the ways that we deal with home repairs is to create an escrow for that money that is going to be set aside for that particular purpose. It might not be in a separate account, but we account for that. And I find that 1% of the value of a newer home is a good escrow maintenance fund. 2% of the value of the home of an older home is probably a better number to use for those older homes.

Dental expenses. I'm thinking of a case just here recently where the client called up and said, “John, I need $20,000.” And I go, “Oh, what for? I hope it's something fun.” She goes, “No, I've got to get a redo on my teeth.” And it can be very, very expensive.

And typically there isn't insurance to cover that in retirement.  You have to buy separate insurance because Medicare does not cover dental expenses. It also doesn't cover hearing aids. And so if you're going to have a loss of hearing, that's also something that you'll need to set aside money for.  Of course, we don't know if we're going to experience that. So again, maybe that's one of those things that is pre-planned and maybe won't need to be used.

Helping adult children is another one. I'm thinking of a case where it was just issue after issue with the kids. I mean, you talk about a perfect storm.  They provided the money for the first round and the second round. And then at the third round, I said, you know what, we're going to have to make some changes to your spending plan if you want to provide that money.  And they did, it was important enough to them to provide that money, but that one was just a real spending shock. It was larger than anything anybody would have anticipated.

The one that we all kind of don't want to think about, but it's out there, is the long term care expense piece. I can't tell you how many times we've started the discussion and people said, “Nope, just take me out and shoot me. I'm not going to go into one of those facilities.” And yet, we know what happens at the end of life. It's usually not your choice. You're going to go there because of the people that have to care for you because it's beyond their ability. And that is the largest single expense that people can experience in retirement.

And the death of a spouse, that premature one.  That's interesting because I'm thinking of a case where this actually happened pre-retirement. And, two things happened. First of all, the spending on the part of the living spouse increased because there were things that the deceased spouse did that now had to be hired out.  Plus just the loneliness factor.  And this guy was a widower. He ended up eating out a lot more and doing things like that because of the loneliness factor. So there can be more than just the cost of the final expenses. Many other things involved with that death of a spouse, especially early on in retirement.

Jim Uren: Yes, that is a key hindrance or key challenge for a lot of folks, as is the other spending shocks we mentioned.

Of course, those are the most common ones. Other ones can come up that no one expects. And really the, the way we can try to handle those is through excess room in the budget, right?  Put in a little extra padding through what we call liquidity planning. So kinda like you mentioned, John, with an escrow.

Sometimes we'll take assets that the clients have and we'll kind of earmark them and pretend they're not there in the plan when we think about your normal monthly budget that you need.  And that way they're available as some of these issues come up. So it's important to plan for them.  But like any plan, you know, it's Mike Tyson who said, “Everyone's got to plan until you get punched in the face, right? And so it's important that your whole financial picture is sound so that if the unexpected happens, you're as best prepared as you possibly can be.

All right, so John, summarize, what we discussed. Why is this so important for folks to make sure they get right, as they think about the year they retire?

John Bever: So the first thing is you want to get this spending number right, because it's something that affects the rest of your life and you don't want to get it wrong where you're going to have to decrease your lifestyle to a level that you're just not comfortable with. You don't want to run out of money before you run out of life.

And so the way that you can plan for this is to take a look at the replacement ratio. That's an easy place to start where you take a percent of your income as that being the number that you're going to need to spend in retirement. Second one is a subtraction method where you start with your salary, your income, whatever that might be, W-2, 1099s, back out your taxes, your savings, and your debt payments and the remaining amount is what you have spent. And, then lastly, just actually tracking your expenses. So start with one of those methods and work through that and then watch out and account for inflation and count for those spending shocks in retirement.

Jim Uren: Very well said. Very important. And, it would be nice, like with an investment statement, if there was just a sheet of paper you can hand us and say, here it is, but this one does require a little bit more legwork than maybe gathering other documents you might use when putting together a financial plan.

So very important. If you need any assistance with this, of course, we're always available to help. If you go to our website, That's, you'll be able to find this episode and we will have a variety of budget gathering forms that you could utilize.

Sometimes that just helps to remind you of categories you might overlook when putting together your retirement budget. We also have a checklist of a variety of the issues that you do need to be considering before you retire. So as you're approaching that year you retire, this checklist will help you make sure you've got some things in order.

Now, be sure to listen to our next episode of The Year You Retire podcast. We're diving deep into the high stakes world of retirement planning.  Focusing on the epic battle of the IRA versus the 401k. When it comes to your hard earned cash, the choices you make in the year you retire are crucial. Do you dare leave your treasure in a 401k vault? Or will you embark on a daring quest of rolling it into your very own IRA? Hold on to your seats as we unveil the thrilling pros and cons of each option in our next episode and also unveil the special circumstances that may apply to you.  And if they do, that you need to be on the lookout for so that you don't make any crucial mistakes.

We do like to close our team meetings every week and therefore our podcast show with what we are thankful for. John, what are you thankful for today?

John Bever: Well, we are at the time of year where the colors are changing and I am so thankful living in the Midwest that we get the change of seasons and the absolutely brilliant colors that the trees can show at this time of the year.

You know, we have a friend in Florida and she mentioned on her Facebook page after my wife, Pam, posted some absolutely gorgeous pictures. She said, “You know, I got to drive 12 hours just to see something like that.” Pam and I commented to each other, “Yeah, we have to drive over 12 hours to see the ocean.”

But, that's what I'm thankful for. I'm thankful for the changing season and the colors that are just brilliant this time of year.

Jim Uren: That's great. It is, it is a wonderful time. And today I'm just really thankful for, it's challenging to say this, all the people in our kids’ lives, all the activities they do, it gets crazy, right? Running these kids around everywhere. But I just think of all the things that they can do that maybe weren't, you know, we didn't have quite as many programs when we were growing up.  But whether it's the teachers that teach them, the coaches that coach them, I'm just really thankful, you know, for them, for the Sunday school teachers that teach them.  And, so thankful for all the opportunities that our kids have today.

So that concludes our first episode. Be sure to tune into the next episode on the IRA versus the 401k.

Discussed on this Episode

2023 Retirement Confidence Survey by The Employee Benefit Research Institute –

U.S. GAO Report on Income Replacement Ratios –

“Exploring the Retirement Consumption Puzzle” by David Blanchett –

“Estimating the True Cost of Retirement” by David Blanchett –

“Shocks and the Unexpected: An Important Factor in Retirement” by Anna Rappaport –



Budget Data Gathering Form

Data Gathering Form for Retirement Lifestyle


Ep. 2 - Head-to-Head Battle of the IRA vs 401k

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