As you plan for your retirement years, don't overlook how household spending changes during retirement. Some expenses typically go way down, while others tend to rise.

SMI's executive editor Mark Biller discussed those changing spending patterns with host Rob West yesterday on MoneyWise. Mark also answered questions from callers. 

The audio is posted below. Scroll down for a transcript.

MoneyWise airs weekday mornings on American Family Radio. A different version airs weekday afternoons on Moody Radio.

For more radio appearances by members of the SMI team, visit our Resources page.


Transcript

Rob West:
Hi, I'm Rob West. I'll talk with Mark Biller today about a more hopeful future for your retirement savings. Then, it's on your calls at 800-525-7000. This is MoneyWise on American Family Radio — biblical wisdom for your financial journey. (theme music ends)

Well, it's always a comfort to have our good friend Mark Biller with us. He's the executive editor at Sound Mind Investing, where they watch and read the financial forecast so you don't have to. Sound Mind Investing is also an underwriter of this program. Mark, great to have you with us today.

Mark Biller:
Thanks, Rob. Good to be back with you,

Rob West:
Mark, we always advise people to take what the so-called financial experts say with a huge grain of salt, and that's especially important with retirement savings, isn't it?

Mark Biller:
Yeah, it really is. Rob, you know, if you read enough of these retirement headlines, you could get the impression that you'll never be able to retire. And we mentioned a couple of recent headlines in this article we're discussing today that came from Fidelity Investments. The first one said that a 40-year-old with household income of a hundred thousand dollars should have three times that amount already saved for retirement at age 40. By age 60, they were saying that multiple should be eight times your household income.

Then there was a second scary-sounding headline — a different Fidelity study — that was saying a 65-year-old couple retiring today should expect to spend $315,000 for healthcare over the course of their retirement. That didn't even include potential nursing home or other long-term care.

Now, as you know, Rob, here at SMI we are all about prudent planning and preparing. We think it's biblical. We think it's wise. And I'm not even saying that there's anything wrong with these studies, that they're inaccurate or anything like that. But the problem with these types of numbers is they can sound so unattainable for some people that it just makes them completely give up even trying to save for retirement.

Rob West:
Well, I certainly hear it in the voices of the callers we get on this program all the time. But to your point, those estimates really don't tell the whole story. So what's missing?

Mark Biller:
What's missing from a lot of these studies is context — you know, what assumptions were they making and coming up with these conclusions. And then there's the way that the results are framed, which admittedly is often intended to kind of deliver a punch, kind of a wake-up call to the reader.

For example, that $315,000 retirement healthcare number I just mentioned — you know, if you break that down over a 20-year retirement into a monthly figure comes out to about $1,300 a month. And that's not probably terribly different from what a lot of listeners are paying right now for healthcare between their insurance premiums, whatever they're putting into a health savings account, out-of-pocket costs, and so on. So it's just — you know, the way it's framed really hits you really hard.

And then one of the most important factors, Rob, that I think is missing from a lot of these discussions is the fact that your expenses are likely to be less in your later years than they are now.

And beyond that, they're probably those expenses are probably going to decline further as those retirement years and decades pass. And that's a really big issue if you're taking the approach that a lot of people use, which is to say, "Okay, my income is X. I need to replace a certain percentage of that — say, 90% of my income when I retire. And then I'm going to just bump that number up by say, 4% inflation every year until I die." Well, if that's the case, then this declining trend of expenses that most people have as their retirement goes on — that's a really big oversight

Rob West:
Mark, let's unpack that a bit further. Perhaps you could help us understand what you mean when you talk about this idea that our expenses may actually decrease.

Mark Biller:
Yeah, absolutely. A lot of expenses that people have during their working years either don't continue at all or they don't continue to the same degree after they retire. And that's why a lot of financial advisors will use as a first step to coming up with a retirement budget, they'll say, "Well, what are your current expenses? And then we're going to adjust that down by some amount like 10% or 20% lower as a starting point for your retirement budget."

But it's important to understand that that actual change in those fixed expenses can vary a lot from person to person. So it's a good idea to try to drill down into how your specific expenses are likely to change in retirement.

Rob West:
Mark, maybe we could get specific here. What are some of the most common expenses that tend to decrease or even disappear after retirement?

Mark Biller:
The most obvious set would be your direct employment costs. So once you retire, you're not going to be paying payroll taxes anymore. You might also save on other direct work-related things — like commuting, work-related clothing, and so on.

But then there are a few that aren't maybe quite as obvious. One is saving. That's a big one. After you retire, you don't have to save for retirement anymore, <laugh> and that's a big chunk for a lot of people. So whatever you're putting into your 401(k) or IRA, you can subtract that from your retirement budget.

And then of course there are "kid" costs. A lot of folks are saving [for] or paying off college expenses until pretty late in the game. And assuming that your kids are done with college and you've paid off any part that you're doing by the time you retire, you can take those costs out as well. For younger folks with kids at home, there are tons of expenses you can probably count on subtracting from your budget — their clothing, activities, healthcare, food, insurance, and on and on and on.

And then the last big one, Rob, that I would point out for folks is housing. You know, we consider it to be a key pillar of wise retirement planning to really make it a focus to enter retirement with your mortgage paid off. And if you're on track to do that, then you can subtract that mortgage and interest payment from your retirement budget. There's also the issue that a lot of retirees choose to downsize eventually in retirement. That can lower your costs for taxes, insurance, maintenance, utilities, those sorts of things.

Rob West:
Yeah, really interesting. 800-525-7000 is the number to call with your investing-related questions, as well as retirement questions and comments. Mark Biller, investing expert. Here with us today from soundmindinvesting.org.

Let's head to the phones. Kay in Texas. Kay, I understand you have a comment on this. Go right ahead.

Caller:
Well, I told your call screener that had you told me before we retired that we could not live on our combined retirement income, I would've laughed in your face. I thought, "Who could not live on $2,500 or $2,600 a month? Of course we can! 'Cause we lived frugally before and raised four kids."

[But now,] I'm going back to work because everything has gone up a whole bunch more than our retirement income has. So I want people to be careful and think — you look at your lifestyle. If you're already living very frugally and your retirement income is like less than 50% of what your other income was, you better figure that you're not going to be able to live on that.

Rob West:
Well, it's a great point because Social Security was really only intended to cover about 40% of your pre-retirement income. So we're not saying that that really replaces saving if you're going to drop 50% or more.

And then, Mark, we have the inflation factor. That's hitting seniors right now. What are your thoughts on Kay's comments?

Mark Biller:
Yeah, I think that's a great point, a great reminder from Kay. And, you know, this year has been particularly difficult for folks in Kay's situation because traditionally retirees rely very heavily on fixed income. You know, we always hear financial advisors telling us that as you get closer to retirement, you reduce risk, you scale back your stock investments, and what do you do instead? Well, you put that money into the "safety" of fixed income. Well, this year has been the worst year for fixed-income investments in many decades. Some people actually make the argument it's the worst year ever for fixed income. And I'm talking about bonds there, if "fixed income" is an unfamiliar term.

So it's been a really tough year — a really tough adjustment for retirees this year, in particular, along those lines.

Rob West:
Kay, any other thoughts before we let you go?

Caller:
Encourage people to seek out a Christian credit counselor or advisors — I don't know what you call 'em, CKA or whatever — as early as you can so you won't wind up in the situation we are in where we have very little invested in the stock market and we're having to call on that for when we have high medical expenses or high dental expenses and stuff like that. And then we have no long-term care insurance or anything, and my husband has dementia and I need to care for him. But I'm also having to try to work to supplement our income. So it's not easy.

Rob West:
I know it's not, Kay. And I appreciate that reminder. I know that's an encouragement to folks out there that, number one, we need to be saving all through our working years and putting away systematically using an advisor, as Kay has suggested, to invest prudently — so that when we get to this season of life, we have Social Security, [and we] have something [else] to count on. Even if our expenses are lower, there's still a gap to make up beyond Social Security. That's got to come from our savings.

So when we get in these difficult times like we are right now, and inflation creeps in, or we have unexpected medical expenses, we have an emergency fund, we've got another income source generated by our investments. And that's really key to getting through the retirement years.

Kay, we'll ask the Lord to give you some wisdom and to honor your hard work as you go back to work to try to fill in the gaps here. And thanks for being a part of the program.

By the way, if you're looking for more biblical resources related to retirement, one powerful tool is the moneywise.org website. Just use our site's search feature. Believe it or not, we have more than 600 articles, videos, and podcasts that offer wisdom and practical help on the subject of retirement from the best content providers in Christian money management. It's available to you at moneywise.org.

And if you want to read the article we're discussing today with Mark Biller, you'll find it at soundmindinvesting.org. It's called How Your Spending May Save Your Retirement.

Much more to come with Mark Biller just around the corner. 800-525-7000. Stay with us. We'll be right back on MoneyWise.


Rob West:
Let's head back to the phones. To Indiana — Kathy, you're next on the program. Go ahead.

Caller:
Thank you for taking my call. I am 75 years old. I retired just this year with the idea that, hopefully, I would be able to re-enter the workforce. I do not have an emergency savings account. I do have only about $11,000 in a Roth IRA account that has been decreasing in its value this last six months. Would you advise me to take the money out and put it into a savings account for my emergency savings? My home is paid for.

Rob West:
Okay, so what are your income sources right now? Only Social Security, Kathy?

Caller:
Yes, just the Social security. That's it right now.

Rob West:
All right. And is that enough to cover your current expenses?

Caller:
Yes, it is.

Rob West:
Okay. So if you go back to work that will give you some margin or surplus, is that right?

Caller:
Exactly. That would be my goal.

Rob West:
Okay. Very good. Mark, your thoughts?

Mark Biller:
Kathy, I think that the idea that you have of transitioning how you're thinking about this money from investment money to emergency-savings money is appropriate because you do need to be thinking about where would I get that next bit of cash if you had unexpected expenses come up. However, I would probably suggest leaving the money within the Roth and simply changing what that Roth is invested in.

And the reason that I would suggest that is if you take the money out of the Roth and, say, put it into a savings account or wherever you would put that money, then you're probably turning any income that you generate into taxable income. That may or may not be an issue — we'd have to get into your tax situation. But generally, you don't want to take money from a Roth environment where any gains that you get, including interest dividends, that sort of thing, is going to be tax-free and turn that into taxable income.

Now, a lot of folks don't really understand that within that Roth umbrella, that account, you can invest that money in just about anything, including the things that you would probably want to transition into —things like a money market fund or an otherwise very low-risk savings-type investment. You should be able to do that right within that same Roth IRA that you already have. So I would talk to whoever the custodian of that Roth IRA is — if you have it with a broker or whoever that is —I would talk to them about how that money is invested now and look at what very low-risk options they have available.

You know, one of the side benefits of having interest rates come up as much as they have this year, while it's been brutal on bond returns having those interest rates come up, it's actually been very beneficial for savers as the interest rates on savings accounts, money-market funds, those sorts of things, have come up very rapidly and are actually now starting to approach some pretty decent levels that we haven't seen in a very long time.

Rob, do you have any other thoughts on that?

Rob West:
Well, I completely concur. And Kathy, just to build on Mark's idea, if you leave it there [in the Roth and] get more conservative, still see it as your first place to go in an emergency. But if you're successful at re-entering the workforce, having now that surplus or margin every month that you can then use to diligently build that emergency savings, then the goal would be — hopefully, that can happen soon enough that it's before any unexpected expense comes — now you've got your emergency fund building, and at some point completely funded, and you've left that Roth money right where it is so it can continue to grow for the future. Does that make sense?

Caller:
It absolutely helps me tremendously.

Rob West:
Well, I'm delighted to hear that.

Caller:
That Roth IRA is in a bank and I haven't been biblically responsible with it, partly out of not knowing for sure who to talk to or how to find out about that. So now I'm more equipped with being able to handle it myself and find out more about what it's invested into and keep it in that umbrella. And hopefully, soon, it looks like I'm going to be able to re-enter the workforce.

Rob West:
Excellent. Thank you for calling today. Delighted to hear from you, Kathy, and all the best to you as you pursue some part-time work moving forward. God bless you.

To Reina in Texas. Reina, I understand you have a question on this topic. Go right ahead.

Caller:
Yes. I have a question. I am 50 years old and I'm planning to retire early. Is it wise decision? Can you tell me your opinion?

Rob West:
Yeah. A quick couple of questions. So you said you're 55 [sic] years old. You wanna retire early? What retirement income sources would you have, Reina?

Caller:
I was working for a school.

Rob West:
Okay. So you'd be eligible for a teacher's retirement plan.

Caller:
Yes.

Rob West:
All right. And what would that monthly amount be that you would get if you retired early? Do you know?

Caller:
No, I don't know. I don't have any idea.

Rob West:
Okay. Mark, that's really, I think, for so many folks, the first step is to figure out what will my expenses be in retirement, and what income sources will I have — and do they match?

Mark Biller:
Yeah, absolutely, that is the first step — getting a really clear idea of what does my retirement budget look like. And that's really what we've been talking about here this morning. And then you can take that monthly amount — your retirement budget — and you can look at the other sources of income you would have in retirement.

In Reina's case, hopefully a teacher's pension of some sort would cover some of it, Social Security at some point covers a piece, and then you've got whatever's left over. That's what helps you determine, "Are my investments enough to make up that gap?"

Rob West:
Yeah. Reina, thanks for your call. Get to work on that budget and those income sources. And if you have questions, give us a call back.

Mark, can you stay for one more segment?

Mark Biller:
Sure. Happy to.

Rob West:
All right. You gotta love live radio. He can't say no! <chuckle> And we'll be right back on MoneyWise. Stay with us.


Rob West:
Great to have you with us today on MoneyWise on American Family Radio. Hey, did you know MoneyWise is listener-supported? That's right. We do what we do every day on the air, with our coaches on the web, and in the app as a result of your listener support. MoneyWise Media is a not-for-profit ministry. And if you consider yourself a part of the MoneyWise family, you appreciate this broadcast and you'd like to be a financial supporter of the ministry, you can do that quickly and easily on our website: moneywise.org. Just click the "Give" button — and thanks in advance.

We're talking with Mark Biller today. Mark is executive editor at Sound Mind Investing. We're discussing a recent article at SMI. It's entitled How Your Spending May Save Your Retirement. Mark, before we go back to the phones here in our final segment, let's continue this conversation.

You know, we talked about the various things that will decrease during retirement. Some spending will actually change during the course of your retirement, correct?

Mark Biller:
Yeah, that's right. We've got different seasons that we navigate within our retirement. And for this, we borrowed from a book from financial advisor Michael Stein, who describes these three different phases of retirement that he calls the "go-go" years, the "slow-go" years, and then, a little more ominously, the "no-go" years <laugh>.

And basically what he's saying is that from roughly age 65 to 75, in that first phase, retirees tend to be pretty active. They're spending a decent amount on travel, dining out, other activities, those sorts of things. But then spending starts to slow. And as you get into those slow-go years, typically most retirees have decreased spending to the point that household expenses aren't even keeping up with the pace of inflation. And then of course from age 85 on up, those are those no-go years, and there's typically very little travel and, and relatively modest discretionary spending.

And so the net effect of all that, Rob, is that when you compare new retirees — that 65-to-74-year-old group — they tend to spend almost 20% less than households between age 55 to 64. So that's a direct comparison of new retirees —about 20% less spending than pre-retirees. As you move out to people beyond 75 in retirement, those folks tend to spend another 20% or so less than those new retirees.

So you can see this progression from pre-retiree to new retiree to we'll call 'em older retirees, and how spending decreases across that range.

Rob West:
Yeah. Now, obviously, there are some exceptions, and there's actually some categories where spending will increase during retirement, right?

Mark Biller:
Yeah, that's right. There are basically 14 broad spending categories that the government keeps track of for retirement spending. And there are a few — cash contributions is one, healthcare is a big one, and then there are some others — that actually do increase. And of course, healthcare tends to be the biggest wild card. And that's where you get into Medicare and Medigap [plans] and all of those types of decisions.

Rob West:
Hmm. Yeah. Very good. Let's head back to the phones. Carol in Oklahoma, you're in this season of life. Give us your experience.

Caller:
Okay. I've entered the slow-go years — I'm 75. My husband and I — we've paid for our home, we've paid for our cars, we have no big expenses of paying anything off. What has surprised us and been an issue — my husband got a good riding lawnmower and all he needed to do to do home maintenance. [But] neither of us can do that now. Things that he used to repair, we have to call someone.

Our lawn expenses this year doubled just having — as a matter of fact, we had less done. It costs almost $400 to have a modest home that has less than half an acre around it — cost us $400 to have it mowed, weed-eated, and the gutters cleaned. And so there are some expenses that have jumped that we did not expect. And there's just — any home maintenance, those costs have gone way up. So those are some unexpected things that we're having to deal with. Even though we have, we had hoped to stay here in this home until we had to enter long-term care but there are expenses with it that we had not anticipated.

Rob West:
Yeah. Perhaps that's another category, Mark, as we think about home maintenance — especially where in this season of life, perhaps there's things that would have been done "in-house," so to speak, that they now have to outsource.

Mark Biller:
Yeah. That's a great point. And I think that's a really good example of the broader point that we're trying to make this morning, Rob. And that is a lot of this is so specific to the individual couple. So if you're a person that has been doing most of the repairs and maintenance and those sorts of things yourself, then absolutely, as you need to bring in more help, that's going to be a significant increase. Of course, other people are going to be looking at that and [saying], "Well, I haven't been paying for that currently. So that won't be a problem for me" — but you might have another area.

So this is where we're really trying to make this point that the retirement "rules of thumb" that you often hear about — this percentage of income and this percentage increase and that kind of thing — those are fine as far as they go. But it really pays to try to get into your specific detail and get as specific as you can about your lifestyle and your expenses and what you should expect in retirement.

Rob West:
Yeah. That's a great point. Carol, thank you for weighing in today on the program.

Mark, as we bring this topic to a conclusion here, what is it you want our listeners to remember or take away from our conversation today?

Mark Biller:
Yeah, I think that the biggest thing is what we led off with. And that is it's easy to get discouraged when you hear some of these numbers and the bottom line reality is anything that you do today to increase your preparation for retirement is going to make you better off — whether or not that's everything you wish you could do, or what you wish you could have done 20 years ago. The next best time to start increasing your saving for retirement is today. So that's the biggest point.

And I would just end with a hopeful quote that we put at the end of this article from a well-known retirement expert who gave us this quote. He says, "Suggesting that retirees should plan for constant inflation-adjusted spending may overestimate the required retirement savings that many households will require for a successful retirement." So there he is basically saying what we've been saying this morning, that these rules of thumb, they're fine. They're a helpful starting point. But go ahead and dig into your numbers and have hope.

And ultimately, as Christians, of course, we know that we need to do the best we can with our part, but then we have a loving, heavenly Father that we can trust to meet our needs — even if our efforts haven't been everything that we would've hoped they could be.

Rob West:
That's really helpful —and hopeful, Mark. The key here is to be well-planned, both in terms of your diligent savings leading up to this season, but also with that budget — and asking the Lord, "What's next for me?" It's not necessarily retirement, but as Ron Blue says, maybe think of it as "rehire-ment" for the Lord's purposes.

Mark, great to have you with us today, my friend. God bless you.

Mark Biller:
Thanks, Rob.

Rob West:
All right. The article's entitled How Your Spending May Save Your Retirement. You'll find it at soundmindinvesting.org.

Your questions on any financial topic next. 800-525-7000. We'll be right back on MoneyWise on American Family Radio.