Funding Your Lifestyle in Retirement

If you are nearing retirement and have your eyes set on that dream day on the horizon, or even if you have recently entered into retirement, you need to know that you're more responsible now than ever in our nation's history for figuring out how to save, invest and convert the financial resources you've spent your entire life accumulating into spending power that will last you a two three-decade retirement. You are responsible for doing the necessary planning in order to fund your ideal lifestyle throughout retirement.

Hello and welcome to the Retired-ish podcast. My name is Cameron Valadez, certified financial planner and enrolled agent. Today we are going to keep things high level. I know a lot of times on this podcast we discuss certain aspects of financial and retirement planning that might be very new to you and fairly complicated.

I try my best to break it down to you or for you in a way that you can understand and learn. Because although some of this stuff is very complicated, simply being aware of some of these complicated things can end up saving you a lot of money, whether that be with your investments, saving taxes, or passing more of your money to your heirs. But today we're going to talk high level about retirement income and your desired retirement lifestyle. Your income in retirement is going to be the lifeblood of your retirement. You are more responsible now than ever in our nation's history to coordinate a plan to fund your desired lifestyle throughout retirement.

00:02:01
Nowadays, the number of employer-funded pensions is decreasing rapidly and therefore, most of you are responsible for accumulating your own savings and investments that you will have to decide how you are going to convert into an adequate income stream. Sure, Social Security may help to an extent, but it is not designed to fully fund your retirement. Plus, who wants to live off just Social Security anyway? The lifestyle that you will be able to live and many of the experiences you will have will be a reflection of what you did to prepare in the decades leading up to it. But even if you think you’ll have adequate retirement income for your lifestyle and your goals, you should still try and make sure that the juice is worth the squeeze, meaning that you should try to make your retirement income as efficient as humanly possible.

One example of retirement income efficiency could be your after-tax retirement income. Another could be the timing of your retirement income. Your after-tax retirement income is really all that matters. You may receive $150,000 per year between yourself and your spouse in retirement via things like pensions, Social Security, and maybe some rental income from properties, but you're likely giving a healthy chunk of that up in taxes, which of course, you don't get to spend. Therefore, just looking at the gross numbers, meaning before taxes that you are going to receive, isn't necessarily going to reflect the lifestyle that you'll be able to live.

Making sure you're utilizing all of the tax breaks available to you and your specific situation can help you enjoy a higher after-tax retirement income and have better expectations regarding how you can plan your day-to-day life in retirement. And as I mentioned, the timing of your retirement income is also key. For instance, if you were to begin receiving some sort of pension immediately after retirement, would that be enough for your desired lifestyle? Especially while you're still young enough to enjoy certain aspects of your life? Will you be forced to generate additional income by filing for Social Security earlier than expected?

00:04:12
If you retire before you're eligible to begin receiving Social Security and your current income isn't high enough, what then? Or will you have to figure out a way to generate a stream of supplemental income from your savings and investments early on to supplement the other income you're bringing in? All of these timing decisions play a huge role in the planning process because they will have an effect on other aspects of your finances. Think of it like a Rubik's cube. You can make certain decisions on one end of the spectrum and solve that side of the puzzle, but then on the other side, it may be far from solved.

For example, if you begin living off of your savings and investments haphazardly at the start of retirement and you live on too much or you withdraw too much too fast, you'll find yourself out of money by the time you're in your seventies. In this case, you solved the retirement income side of the cube on day one, but the other side, representing the later stages of life, is a mess, then you may be left with making major life-changing decisions at that time, which changes your desired retirement lifestyle entirely.

Once you're at the point where you are ready to make a retirement decision or set a goal for a specific retirement date, you've likely run the numbers to an extent and feel that you have reached the top of the mountain. However, descending down the mountain is a totally different scenario than climbing up it. You know you will need a certain amount of retirement income at the start, but that amount will likely need to increase over time due to things like inflation and last you a certain period of time over the rest of your life, which will be largely unknown. Descending down the mountain means sustaining your desired lifestyle while also spending down your retirement savings.

00:05:57
It's a different feeling in a different environment altogether. You’re no longer socking money away. It's time to start using it. Along the way, you’ll encounter different obstacles and risks that will threaten your retirement income, so you'll need to be prepared when those things come up. In addition to your income, you’re likely to have other goals that require even more money or contingency planning, such as making sure your spouse would be financially secure should you pass away prematurely.

Maybe you end up helping your kids out with the purchase of their first home. Or maybe you get bored in retirement and decide to start renovating your entire home. The list goes on. These represent various goals and or risks that can change the trajectory of your income and your lifestyle. Many of these may not have been part of your original plans at the onset of retirement.

If and when you do decide to officially retire, you will only have so much to work with, since you likely won't be earning a steady paycheck and the occasional raise. And as you age, for most people, the last thing they want to do is have to go back to work, especially in your later years. You want to learn how to become as efficient as possible with what you have nearing retirement so that you can mitigate the impact of the obstacles you're bound to face along the way. Being efficient can allow your money to last longer, allow you to have adequate finances to meet other unexpected cash outlays, and possibly allow you to do so with fewer financial assets and resources than you may have once thought. And this leads to the next big question, which is, where are you going to get your retirement income from?

As I mentioned, you may have a steady income stream from things like Social Security or a pension that are going to pay you no matter how long you live. Maybe you have passive income from rental properties or partnership interests in a business, etcetera, that provide you a good amount of income, but can be variable in that sometimes you'll run into hiccups where that income stream goes through changes such as vacant properties or a year or two where the partnership incurs losses. Maybe you have an annuity product that acts like a pension, or you regularly spend down retirement accounts. There is no exact superior method to any other. Regardless of where your income will come from, you will want an income stream where you can understand how it may change over time and the risks that are involved.

00:08:28
Each income stream or strategy has its own benefits and drawbacks. To help illustrate what I mean, I'd like to share a story with you about someone whose entire retirement income and lifestyle were driven by their real estate investments. This individual was a very successful real estate investor and had accumulated well over 50 doors throughout his lifetime. Most properties were paid off, but some of the more recent ones he had acquired weren't paid off yet. At the onset of retirement, things were great, the income was fantastic, taxes were minimal, and life was good.

However, once he got into his mid-seventies, things started to change. To fill up his time, he started to embark on bigger real estate projects and experiments with short-term rental properties that cost quite a bit of money and he no longer wanted to manage the properties that he already had. He was over dealing with tenant issues and everything that goes along with that.

In a relatively short time span, he had delegated the property management duties of the family real estate portfolio to his adult child, who he now had to pay in order to do so since it was easily a full-time job. This was a new expense he had never thought he would have at the onset of his retirement. He figured he would do it himself forever.

In addition, he had no other savings or investments at all, just the cash flow from his properties that he had become accustomed to living off of for the better part of two decades. But because he wanted to embark on new and expensive real estate projects, he needed lump sums of money to do so. So he began pulling equity out of some of his properties for the cash, and months went by and he took even more cash, and then even more cash, and so on and so forth. And since we all know real estate projects always get more expensive the more you get into them, eventually, it got to the point that he was having issues with his lifestyle and spending since he now had much higher monthly expenses because of his loans and his new property management expenses.

00:10:34
In addition, he began to lose some of the tax benefits of depreciation on some of his initial properties. He had grown accustomed to living off such a large monthly income that now he needed to make lifestyle changes just to make sure he could pay his required bills, which was not ideal. I would also question what would happen if he ever needed a lump sum of money for an unexpected health event or what have you. He would likely need to continue down the path of pulling out equity, even selling properties for his liquidity needs, both of which would further diminish his retirement income moving forward.

Now, the reason I wanted to share that experience is to illustrate the importance of understanding the lifestyle your retirement income will provide, not just at the onset of retirement, but throughout your retirement. Just because he had successfully climbed the mountain doesn't mean that the descent would be smooth sailing. In this case, it wasn't that real estate wasn't the right way to go for him. After all, it's what he was good at, and it was working just fine at one point, it was just that he wasn't prepared for how his retirement income would mesh with his lifestyle, the potential risks involved, and the things that he may have wanted to do over the remainder of his life. In other words, his goals.

These types of unforeseen obstacles, we'll call them, can happen no matter where you generate your retirement income from, whether that be real estate, investing in the markets, or maybe living off of income from a business. The key is having a bit of diversification in your income sources, making sure you have the money you can access and an emergency fund, and a full understanding of the risks involved over the remainder of a potential 20 to 30-year retirement, and having a plan of how you will deal with those risks when they arise.

00:12:24
If instead, you just wait until there's a fire to come up with a plan, the financial ramifications can be significant. Another important concept when it comes to spending in retirement and lifestyle needs is personal preference. Like I said, there isn't one superior way to generate income in retirement.

Each method or combination thereof has its own benefits and drawbacks. There will always be certain risks present depending on where you end up getting your income from and how you go about doing so. However, what's important is that it is something that you can understand and for lack of a better term, buy into. If your friend is preaching to you that you need to accumulate real estate and then more real estate to supplement your retirement income, but you're already approaching retirement with little experience and know-how with real estate, you may run into plenty of costly blunders trying to rush in that ultimately puts you in a worse position.

On the other hand, if you've accumulated money in stock market investments, your entire working career in something like a 401(k), but you have no idea how to go about making distributions from that account so that it can last you 20 to 30 years, you may run into serious issues there as well if you go about it haphazardly. Both of those can work, and many other income strategies as well. But you have to understand how and why you are doing it the way you are and figure out what specific risks will go along with it.

Going back to the 401(k) example, if you are scared to death of losing money in the markets and aren't sure how to manage a retirement income stream from your retirement savings efficiently, then you should either try to educate yourself more on the process until you are comfortable, you could seek help from a professional or maybe try a different method entirely.

00:14:15
If you aren't buying into your own process, you're likely going to make emotional decisions at the wrong times, which are usually the costliest decisions and can often be irreversible. When it comes to your investments, it is too easy nowadays to make a serious, life-changing mistake just by the click of a button. Personal preferences are also important because they tie into your goals. If let's say, you have accumulated a rather substantial nest egg to supplement your retirement income, do you want to be sure that you can get as close as possible to spending it all during your lifetime and having the best lifestyle possible in retirement? Or would you rather live frugally and enjoy some lavish spending from time to time and hope to leave somewhat of a financial legacy to your spouse or children?

The different goals you have may lead you to prefer one retirement income source over another. By starting your planning with goals first, you will be able to determine what you can spend and therefore the lifestyle you can afford throughout the remainder of your retirement. So when it comes to gearing up for your dream retirement, remember to keep these five things in mind.

Your retirement income will drive your lifestyle in retirement, not necessarily your net worth or the value of everything you own. As you learned from my story about the real estate investor. Number two, your after-tax retirement income is what matters most, since that is what you actually get to spend and live the lifestyle you desire. Number three, understanding the timing of when certain income streams will start and stop is key to having the right expectations in retirement. Number four, whatever path you choose for retirement income, you'll need to understand the potential risks and or trade-offs that are associated with it. Number five, personal preference plays a huge role in deciding how to structure your retirement income plan, since an income plan that you might ultimately give up on is essentially useless and could set you back even further.

00:16:17
So that’s it for today's show. Please remember to send in your listener questions and I will do my best to answer them anonymously on a future episode.

And thank you to those who have already submitted questions. We have a few here that we will be answering on the next episode, so be sure to tune in. If you have a question that you want answered, you can use the link in the episode show notes to email it in or voice record it straight from your mobile device. I make it easy on you guys. And don't forget to sign up for the Retired-ish newsletter to get your free retirement planning quick guides for 2024 and useful and easy-to-digest information on retirement planning, investments, and taxes once a month, straight to your inbox. No spam. If you find this show actionable and insightful, please do yourself a favor and subscribe to or follow the show on your podcast app and even share it with a friend who you think may benefit. They don't teach this stuff in school, so the more you and your friends and family know, the better off everyone will be.

If you want to learn more about the topics I went over in today's show, you can find the links to the resources we have provided in the show notes right there on your podcast app. Or, of course, you can visit us at retiredishpodcast.com/43. Thanks again for tuning in and following along. See you next time on Retired-ish.

Disclaimer
Securities and advisory services are offered through LPL Financial, a registered investment advisor, member FINRA, SIPC. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

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