Listen Now:
The Smart Take:
In this episode, hear Tyler Emrick, CFA®, CFP®, discuss why meticulous budgeting isn’t necessary for most approaching and into retirement. While it is important to measure your lifestyle spending, there are smarter and easier ways compared to budgeting.
Be sure to pay attention to the “Retirement Spending Smile” concept to properly reflect how your retirement expenses will likely change over time. Plus, we’ll explore how your financial advisor should be helping you monitor spending against your goals.
Here’s some of what we discuss in this episode:
- The common perception of budgeting and why a detailed budget might not be necessary.
- What areas of your expenses should you be focused on?
- The importance of identifying and understanding the spending associated with your lifestyle.
- Anticipating how your lifestyle will change in retirement and how that will impact expenses.
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
As retirement approaches, many believe meticulous budgeting is essential, but is it really? In this episode, we’ll explore why understanding your lifestyle spending and anticipating changes over time can lead to more effective and less stressful financial plan. All coming up today on Retire Smarter.
Walter Storholt:
Hey, it’s another edition of Retire Smarter with Tyler Emrick, certified financial planner at True Wealth Design, also a chartered financial analyst. I’m Walter Storholt. Great to be with you today. Find us on truewealthdesign.com. We’re talking about budgets or maybe no budget needed, perhaps, on today’s show. Should be a great conversation.
But before we get to all of that, Tyler, it is great to talk with you once again, my friend. And here we are already set to wrap up July, believe it or not.
Tyler Emrick:
I know. It’s amazing how fast it goes. July is a big month for me in the Emrick household. It’s my wife’s birthday. It’s actually my wife’s birthday today, so happy birthday shout-out to Jen.
Walter Storholt:
As we’re recording.
Tyler Emrick:
Yes.
Walter Storholt:
Tyler said, “Sorry, Jen. I got to go do a podcast even though it’s your birthday.”
Tyler Emrick:
That’s right. Hey, I’m leaving right after the podcast.
Walter Storholt:
There you go.
Tyler Emrick:
We got a full day planned.
Walter Storholt:
Nice, nice.
Tyler Emrick:
Actually, no, she’s working today, so …
Walter Storholt:
Now you’re lying to us. You’re really just off the hook till the evening. You’re in good shape here.
Tyler Emrick:
Fair enough, fair enough, fair enough.
But yeah, no, the sun’s shining. Happy to be here. I think we got a pretty good topic planned for today. We’ll see how it all shakes out.
Walter Storholt:
Yeah, should be good stuff.
Well, as you kind of sent me the idea for today’s podcast, Tyler, I saw the very first sentence was forget the traditional budget. I was like, “All right. I think people are going to be on board with this.”
Tyler Emrick:
Right? I don’t know. When I think about a budget, even for myself being in the financial planning industry for pretty much all of my career, even when I hear the term budget, it kind of makes me a little bit uneasy. So, I don’t know how the listeners react-
Walter Storholt:
I’ve heard people call it the B-word, so, you know.
Tyler Emrick:
Well, I’m sure there are some. And there are definitely some out there where meticulous budgeting and Excel spreadsheets are like their favorite thing. Right? Trust me, we probably have a few of those listeners out there right now.
Walter Storholt:
I mean, I’ve got some pretty cool spreadsheets about finances, but I call mine money flow. I don’t call it a budget. I call it money flow. It’s all keeping track of the cash flow and the flow of money just to see if I’m running into any trouble as I look out a few months into the future. I guess it’s a quasi-budget, but I’m definitely not actually tracking all of the expenses, necessarily.
Tyler Emrick:
Well, that’s a nice little headline.
Walter Storholt:
It’s a step in that direction.
Tyler Emrick:
Hey, look at you headlining into what we might be getting into today. Maybe some of the intricate details of what we’re getting at because, I don’t know, my household, that budget might be, “Hey, what was that Amazon purchase? What’s going on?” Getting down into it. “Was that you? Was that me?” And just making sure we’re on the same page.
But of course, as always, and I’m trying to think through the podcast, I did have to look up the definition of budget. I went to consumer.gov. They define a budget-
Walter Storholt:
What’s it really mean? Yeah.
Tyler Emrick:
Mm-hmm, yeah. A budget as a plan you write down to decide how you will spend your money each month. A budget helps you make sure that you will have enough money every month. Without a budget, you might run out of money before your next paycheck. And we definitely don’t want to run out of money before our next paycheck. I don’t know about you.
Walter Storholt:
That’s correct, yes.
Tyler Emrick:
I think that line-by-line meticulous detail is really the point that I want to get across in saying not every family is going to need that level of detail, especially if you’re sitting here listening and those spreadsheets really aren’t your form of excitement and don’t get you up in the morning thinking about diving into spreadsheets and budgets or whatever. Well, I was going to say mint.com, but I don’t even think we have mint.com.
Walter Storholt:
It went away. Yeah, that’s right.
Tyler Emrick:
It did. It did.
Walter Storholt:
It went out of business or something.
Tyler Emrick:
Now, before I dive into it too much, let me preface it, or let me maybe give a little bit of a disclosure here. There are times when a detailed budget might be helpful. Right? I mean, hey, you just got your first job out of high school or college and you’re trying to wrap your arms around having some money actually coming in. We run into it from time to time with doctors just finishing up residency. Some of these individuals are in their mid-30s and they’re about to get a huge influx of cash. Their pay is going to increase substantially. Sometimes, going down into the more meticulous details makes sense for that. Or, of course, if you’re an individual that’s trying to wrap your arms around just your debt and debt management and getting out of debt, yes, those are scenarios where that detailed budget might make a little bit more sense.
But for the vast majority of listeners who are here, really probably just getting started thinking about retirement, maybe you’re in retirement, or maybe even you’re just getting serious about retirement because it’s a few years off, likely that idea of, “Do I have enough?” Well, you started to save, you started to accumulate some of those assets. And we’ve kind of … can move on from that meticulous detail and a line-by-line budget and go on to something that we feel is maybe a little bit more efficient, a little bit more easy to manage for the families and clients that we work with. We think you should focus on and understand the spending associated with your lifestyle and how that will change over time. I’ll say that again. You need to understand the spending associated with your lifestyle and how that might change over time.
Walt, does that sound very similar to a budget?
Walter Storholt:
It does, yes.
Tyler Emrick:
It might.
Walter Storholt:
A little bit similar, yeah. Actually, it seems like you’re zooming out a little bit. Right?
Tyler Emrick:
Correct.
Walter Storholt:
It’s not this, “Okay, can we make it to the next paycheck?” It’s more, “Let me zoom out. What’s the rest of the year look like?” I’m thinking now about two, three, four, five, six years into the future and more.
Tyler Emrick:
Mm-hmm.
Getting back to that flow comment that you made a little bit earlier, I think kind of hit the nail on the head. I think that’s a good point. For the bulk of the pod today, I really want to just dive into this comment, maybe break it down into two sections, and focusing on let’s understand what do we mean by understanding spending associated with your lifestyle, and then we’ll finish up with that comment about how will your lifestyle potentially change over time.
I’ve sat down with a number of families over the years, and I’ll tell you, when we start thinking about retirement and we start having that conversation, very rarely, I can’t even remember a time where I’ve sat down with a family and they’ve gone, “Well, I’m going to just stop spending. I’m going to change my lifestyle. I’m going to cut out all my bills once I retire and pretty much not leave my house.” That’s not normally the case, or that doesn’t pop up.
Normally, when we start having those conversations and we start thinking about what does retirement look like to you, or the old adage of paint me a picture of what you’re doing in retirement, and we kind of drill down into what that retirement picture might look like and what you’re doing. Oftentimes, there are a handful of things that come up, whether it’s spending more time with family and kids, traveling, staying at home, reading a book, whatever it is and whatever it is for that family. That lifestyle, very rarely, if ever, have I had a conversation where families are saying, “Yes, I want to change.”
Certainly, sometimes they want to increase because those travel goals or those travel expenses might be a little bit more now that they’re not spending 40 hours a week during a job, so they have a little bit more time to do some of the things that they want, golfing or whatever it might be. I have seen it where that lifestyle spending might ratchet up a little bit in retirement, but I certainly have never seen it to where, “Hey, we want to decrease spending.”
When I think about budget or I think about that line-by-line accounting of where your money’s going, I think it’s like you want to stay on track and cut where you can and make sure that you’re staying within the parameters that you set for yourself. So, understanding and having those conversations around lifestyle is a little bit better way to think about it, and maybe that first step to start thinking about what is your spending associated with your lifestyle.
Walter Storholt:
Yeah. I kind of like that idea. It feels familiar to me, Tyler. Actually, I’ll share this. I have felt guilt for not actually being more detailed in my tracking. But we do sort of do it where, okay, we pay ourselves first, any donations and things like that that we’re doing. I’ve got those tracked and when they come out. And then, of course, all of just your standard stuff that’s the same every month. Then I pretty much at that point say, “Okay, we’ve saved for retirement. We’ve put money away into whatever accounts that we want.” I know that all the bills will be paid and allocated for and giving. Those three categories are all taken care of. All that’s left is just the life spending of the month, food, going out to eat, just random things we buy on Amazon, whatever the case may be.
Tyler Emrick:
Amazon gets me.
Walter Storholt:
Whatever’s left is what the budget is for that stuff. So, there’s this big miscellaneous section at the bottom of the month that just gets whittled away from. That’s sort of, I guess, a little bit of how we’re doing it. It feels kind of familiar, like that’s lifestyle in a way, tracking and spending.
Tyler Emrick:
It is. Well, and two, I think it’s important to understand how do you get there, how do you start to think about it. If you’re not going to be going line by line on a meticulous budget, how do you get to this lifestyle spending? Or how do you at least gain some understanding of what does your spending look like?
I think that might be a good place for us to have a conversation, is from our standpoint, we take every family that we work with through what we call a Retire Smarter solution. Part of that solution is a section called lifestyle analyzer where we are actually doing the work and having the conversation of where is your money going and how can we wrap our arms around it. That process, the way that it starts for us is we take a look at your prior year and specifically your prior-year tax return. Why do we do that? It’s because, well, if we look back on the prior year, it’s set, it’s finite, and the spending has already happened. So, if we can use some of these tools such as your tax return, then we can start to analyze and start to break down where did your money go. Okay?
The exercise that we take clients through is saying, “All right, let’s get your tax return.” We put it in a nice spreadsheet. We start high level at the top and say, “All right, how much money did you have come in? Did it come in from working? Did it come in from some other income stream?” Then we take that number and say, “All right, let’s start breaking down and identifying where that money goes.”
There are some easy things that we can pull right from your tax return to be able to break off and lower that income number to start to get that idea. The easiest one for me to explain would be your taxes, right? All of us are paying taxes every year, so we can take an inventory of your taxes and separate that out into its own category. Then we can also go in and start to identify some major spending items.
What does major mean? That could be different for everybody, but for me, it’s anything over, say, a thousand bucks that you spent on that year that might not be there every year. Let’s say you had to replace your water heater and it cost you a few thousand bucks. Well, that would be an expense that we would identify that you paid out of that money that came in that prior year, but yet you’re not going to have to replace your water heater every year.
Other expenses that come to mind that we’re trying to identify are your mortgage. How much do you have going out in your mortgage? Now, mortgage can be a tricky one because you got to be mindful that you’re probably paying property taxes there, too, and your property taxes are going to be with you for the rest of your life, likely, as long as you’re in that helm. But your mortgage will eventually be paid off at some point in time. We’re able to identify that as an expense that would maybe change throughout retirement and account for it separately. Another one would be car payments, travel, so on and so forth. There’s a host of these expenses. When we’re walking through this exercise, our goal is to start at the high level, what came in, and start peeling off expenses and accounting for them separately. Big ones, not the minutiae of like how often did you go out to eat and did you go to a nice dinner or not, or whatever.
Walter Storholt:
The answer is always too many times.
Tyler Emrick:
Yes, yes.
These are big items. When you’re going through an exercise like this, I think it’s important to remember that we’re trying to identify things that might change throughout retirement, things that you might pay off, or things that aren’t going to be there every year. Maybe you still have one of the kids in the house and you’re paying towards their college education. Likely, you’re not going to be paying for that through the entirety of your retirement. So, identifying that as expense, pulling it off, and accounting for it separately is certainly going to be helpful and something that we would want to do.
When you go through that exercise, and at the end of it you kind of take a step back, what you’re left with is you’re left with this big number that came in from an income standpoint, and you’ve slowly peeled off all of these expenses, taxes, mortgage, car payments, and you’ve gotten down to what we call a basic retirement living expense number. What that number is and what we’re trying to identify is those spending goals that are not going to change throughout retirement. They’re going to be with you forever. We call that your lifestyle spending. That’s what you’re going to need to put gas in the car, keep groceries in the fridge, keep the lights on at the house, so on and so forth. When we have that number, what we can then do is then we can start to use that to build out a financial plan over the course of a long, happy, healthy retirement.
We feel like this process allows you to be a little bit more efficient and a little bit more fluid and allows you to better account for the spending changes through retirement and identify those big spending things that come out because what we’re able to do is take that basic retirement lifestyle expense number that we got down to and use that as the foundation for maybe what your retirement spending’s going to look like. Because then we can start to take that number and then build on and have that conversation of what retirement looks like and build on extra expenses on top of that that might change throughout retirement, things like travel, things like your car. You probably aren’t going to buy a car in your 90s or your late 80s. You’re probably going to keep the one that you have. Or maybe you don’t, right? But if we assume that you’re going to have a car payment through the entirety of your retirement, well, that might not be an accurate representation of what your spending actually is going to look like.
Which is a nice segue into, hey, we’ve done all this work and we’ve done that exercise of looking at prior year spending and back down into that basic retirement expense number. Now we need to start focusing on that second part of the comment of how will your lifestyle change throughout retirement because the number that we just calculated, that’s not changing. That basic retirement expense, that’s our core. Now we need to start to get an understanding of how your lifestyle is going to change over the course of retirement.
There is a host of data out there, Walt, and studies and all that good stuff around how are retirees going to spend throughout retirement. I mean, shoot, I think you and Kevin even did a podcast on some of the data that we lean on quite a bit from David Blanchett and the article that he did in 2014 called Exploring the Retirement Consumption Puzzle.
Walter Storholt:
Yeah. We had, if I’m not mistaken, David Blanchett on the podcast. I believe Kevin interviewed him at one point. Let me see. Yeah, interview with retirement researcher Dr. David Blanchett, two-part series that Kevin did an interview. That was back in 2022, in June of that year, so this will be easy to remember. We’ll also link to it in the show notes. You can go find that interview in the show notes or the description of today’s episode. But it’s also episodes 101 and 102 of the podcast. If you want to go check that out for more information on Blanchett and his findings, feel free to.
Tyler Emrick:
The data’s great. Really, what came out of his work was this idea of the retirement smile. Certainly, you can do an internet search on it. David’s work will pop up. You can get down into the nitty-gritty and the details of what all goes into it, but I’ll do my best to give you a high level here. What the results of his work showed was it really did a deep dive into retiree spending patterns and how that actually comes to fruition. What came out of it was this idea that your spending is not going to be linear throughout the entirety of retirement. If you assume that, hey, you look at what you’re spending now and that you’re going to need that into your 60s, 70s, 80s, and 90s, that’s likely going to be very conservative and really overestimate the amount of money that you’re actually going to need throughout retirement.
What David’s work suggests, that although retiree consumption basket is likely to increase at a rate that’s faster than general inflation, actual retiree spending, it tends to decline in retirement in real terms. This decline or this decrease in real consumption is about 1% per year during retirement. If you think about it, you retire in your early 60s, your spending is going to be pretty high, potentially. You’re doing the bucket list items. Maybe you’re paying off, you’ve still got a mortgage and your house isn’t paid off yet, or you still have a car loan, or whatever the case may be. Maybe you still have a child in college. But over time, and you progress through retirement, your spending in real terms decreases by about 1% per year all the way until you get into about your mid-80s. Then it starts to ratchet back up again with your healthcare costs growing at a rate that’s faster than your spending is declining as you age throughout retirement. If you think about what that forms, it forms kind of a U-shape, or a retirement smile.
We feel that that’s a much, much better way to go about your financial planning and start looking at retirement because just using a flat number and assuming that it’s going to be stagnant or linear throughout retirement is going to really throw off those numbers and potentially make you work longer than what you really have to hit the spending goals that you’re trying to accomplish.
I’ve heard advisors in our office explain it a little bit different than the retirement smile. We essentially break it down into decades. Basically, your first decade of retirement are the go-go years, your second decade of retirement are the slow-go years, and then, of course, your third decade of retirement are the no-go years. So, go-go years, slow-go years, and no-go years. I don’t know if that’s popped up on the podcast yet or not.
Walter Storholt:
Yeah, I’ve definitely heard it for sure. We’ve got some friends who are a couple of years into retirement. They’re in their third year of retirement. They absolutely are in the go-go years. They’re insane. We’re like, “We can’t keep up with you guys. You’re crazy.”
They’re like, “Yeah, but we know in a couple of years we’re not going to be able to do the stuff we’re doing right now, so we are go-going.”
Tyler Emrick:
Right. Yes. That’s fascinating. And more power to them, right? I mean, frankly, think about the confidence that you have to have in your financial plan to maybe spend a little bit more than what you’re comfortable with early in retirement when your health is good and you know that you have it because you have the confidence in the work that you’ve done to say, “Yep, I know my numbers well enough and I understand what my financial plan looks like to where this is how it’s going to work and this is how I’m going to run it.”
I’m sure for some families that’s a tough transition. You’ve worked all your life, you’ve saved. Now you’re turning the corner and you’re like, “Oh, hey, I got to start using that savings? Oh, wait, I don’t save anymore? I actually spend?” And it go down. And then you pair that with maybe you’re waiting on your social security and you’re using your assets now. It can be difficult and certainly can be a change emotionally as you transition into retirement, so as much of that work that we can do upfront, as much as we can get our families and clients on board with that financial plan and give them the confidence to be able to do it, that’s a big part of what we do. And I think it’s a big part of the value that you can get heading into retirement with that peace of mind to do some of those things that maybe you historically haven’t or maybe are a little bit uneasy because the spending’s a little bit higher than maybe what you traditionally have done over the course of your working years.
Walter Storholt:
Yeah. I think it’s interesting, though, because sometimes the monikers, the simplified versions of these things don’t necessarily match up with the truth. I feel like that’s definitely, maybe, the case with that go-go, slow-go, and no-go years because you talk about in the no-go years, makes it sound like you’re not going to be spending any money at all. It’s just different money that you then end up spending during that time with the healthcare issues. It doesn’t totally absolve you of … It just simplifies it maybe too much sometimes. It’s good to still get back a little bit into that, at least to use you guys, for those who don’t like it, back into that spreadsheet mentality. I can see the benefit of that.
Tyler Emrick:
Correct. And this is what gets into that whole if I’m not doing a budget, how do I track and make sure that I’m still on track? How do I track and make sure I’m on track? It’s a little confusing, but essentially, how are you monitoring that spending and making sure that you’re not going off the rails? I think that’s where, one, a good financial advisor is going to come into play. And if you don’t have one, obviously this is something that should be on your radar as you’re tracking. But when we look at our family spending over the course of a prior year to try to say, “Did we spend what we expected? Are we still on track or did we overspend? Or did we underspend?” And do we need to nudge and say, “Hey, you had this much earmarked for travel and you didn’t do it.” Or whatever the case may be.
But that monitoring aspect, I don’t want to lose sight of that. I think that’s extremely, extremely important. The way we handle that here at True Wealth Design is when our families come in for meetings, we’re always getting an update on the cash reserve level. So, hey, how much do you have in your checking and savings accounts? And the reason why that number is very important to us is that when we’re building out an income plan for a family for a year and saying, “This is where we think you should pull your money, this is the tax withholding that you need to do.” If your spending goal is in line with that work that we did before to identify your lifestyle spending, we should have a very good idea of, hey, the money that you have coming in your cash levels might be maintained throughout that year. Or how much should they decrease?
We’re able to monitor that on a year-in and year-out basis by understanding how your cash levels are going to change over the course of a year. Because if we set up our distribution plan with the spending that we have built-in, then it’s a lot easier for us to be able to track that. We’re going to know how those cash levels are going to change over time. If your cash levels are lower than what we expected, then we know you spent a little bit more than what we had earmarked for the year. Was that a one-time thing? Is that something where we need to maybe adjust and look at the spending that we have in the plan and kick it up a little bit to make sure that we’re giving you an accurate representation of how are things going year over year? How’s the boat going? And where are we tracking from a spending standpoint?
If your financial advisor’s not understanding that and just really taking your word for, yeah, this is what you need from a spending standpoint, and all right, how much do you want deposited in your bank account each month? And there’s nothing being held accountable there or at least no tracking to understand where it is. I think that’s where if you don’t have that and you don’t have a budget, that’s where you can really go awry and get yourself into a sticky situation if you start overspending for an extended period of time.
Walter Storholt:
Yeah. It sounds like you’re saying you’re not telling every client that comes to the door, “Hey, you’ve got to sit down and do this monthly budget and carve out this two hours of your life to pour through all of your receipts and track every dollar that’s coming through.” No, no, no. This is not that kind of budget. This ain’t your grandpa’s budget, you know?
Tyler Emrick:
Sure. Correct. And lean on your professional that’s helping you navigate through this, too, right?
Walter Storholt:
Yeah.
Tyler Emrick:
Especially if you’re an individual that likes to get down into the meticulous detail of how much is going to Netflix each month, how much is going to Amazon, or whatever the case is. And I think what we’ve built here at True Wealth Design gives us the ability to get some insight and understand how that spending is changing or what happened over the prior year and really give you good advice on understanding like, yep, you’re on track, or this is what we’re seeing and how should we tweak it. I think it’s, again, a much more efficient way than every single month looking and balancing the budget and understanding exactly.
Now, again, for those listeners out there that love to do it, sure. If that gives you the peace of mind, it gives you the confidence, keep doing it. But I’m more so speaking to those families out there that haven’t started talking about the conversation because they think they may be overspending, or they haven’t saved enough for retirement, or maybe they don’t have the confidence to want to go down and get that level of granularity into their spending.
There is another way. And boy, this way is actually, I think, a little bit more efficient and certainly can work very, very well for a number of families. This idea of understanding what your lifestyle spending is and understanding how that changes over time. We spend and do the work upfront to understand those numbers. Well, that’s going to set us up for success as we transition into retirement. As the years pass in the retirement, that work, we’re going to lean on and monitor it and adjust as time progresses. I think it’s just a nice, fluid, efficient way for families to track that spending and really make sure that they’re using their money for what they want and using it for its best case, so that way they can accomplish whatever goals that they’ve set for themselves.
Walter Storholt:
Again, if you want some more information about the data behind this, all you have to do is go to the description of today’s episode. We’ll have linked in there that interview with Dr. David Blanchett. In the meantime, if you’d like to work with an advisor who does this type of planning, helps you look under the hood, and can do a lot of this spreadsheeting and line-by-line item looking and understanding and research for you, that’s a great opportunity to work with the team at True Wealth Design. The way to get in touch and schedule a conversation is to go to truewealthdesign.com, click the “are we right for you” button, and you can see if you’re a good fit to work with the team. All you have to do is do that. You’ll schedule a fifteen-minute call with an experienced advisor on the True Wealth Team. Again, that’s at truewealthdesign.com, or you can call (855) TWD-PLAN. That’s (855) TWD-PLAN. Or go to truewealthdesign.com.
Great episode today, Tyler. Appreciate your insight and your help. And have a great evening with your wife. Happy birthday to Jen. Hope everything goes smoothly for you this evening, taking her out to somewhere tasty to eat dinner and all that good stuff.
Tyler Emrick:
We’ll see. We’ll see.
Walter Storholt:
Yeah.
Tyler Emrick:
[inaudible 00:27:37].
Walter Storholt:
We’ll chat in a couple of weeks.
Tyler Emrick:
You got it.
Walter Storholt:
All right, man. Sounds good. That’s Tyler. I’m Walter. Thanks for joining us, everybody, and we’ll see you next time right back here on Retire Smarter.
Speaker 3:
Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
