Mastering Retirement Cash Flow (Part 1): Understanding Changing Expenses

In this episode, we’ll explore many of the expenses in your life that might drastically change (one way or another) in retirement. We’ll break those expenses down further to see which ones are the top priorities and analyze some of the other factors that impact your cash flow in retirement.

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Transcript of Today's Show:

For a full transcript of today's show, visit the blog related to this episode at https://www.pfgprivatewealth.com/podcast/

Marc: Welcome back to the podcast. It's Retirement Planning-Redefined, with John and Nick here with me to talk investing, finance, retirement, and mastering retirement cashflow, part one, is going to be the topic today. We're understanding just changing expenses. We're going to break this into really a two-parter here, obviously, by calling it part one. And we'll do a little more focus on some of the other things on the next session. But for today, I want to explore some of the expenses in life and how they just change as we're moving some things ... as we're moving from working into retirement. And things you guys see with your clients and how you work through that process for them. So that's the topic today. Let's get into it. John, first of all, how are you doing, buddy?

 

John: I'm doing all right. Getting ready for the summertime here.

 

Marc: If it happens. I don't know what's going on in the south. I'm in North Carolina, and we've had one 90 degree day, and it's almost July. Totally unusual for us, so it's very, very weird.

 

Nick: Oh, it's hot here.

 

Marc: Yeah. It's like two states seem to be in a weird spot. I don't know what's going on with the middle of the south here. It's very strange this year. But Nick, I heard you chime in. How are you, my friend?

 

Nick: Doing pretty good.

 

Marc: Yeah. So you guys are sweltering, is that what you're saying?

 

Nick: It's definitely hot, yeah.

 

Marc: Well, kick a little this way because I don't know what's going on. It should be warmer here than it has been. So, very weird.

 

Nick: Well, I'll trade.

 

Marc: Okay. All right. Yeah. Like today, it's ... well, we're getting a ton of rain. Today, taping this podcast, it's 72 for the high, and tonight's overnight low is 58. That doesn't happen usually in North Carolina in late July or late June.

 

Nick: Yeah. That is pretty surprising. That's cool for North Carolina.

 

Marc: Very, very weird. So I don't know, Mother Nature is off her meds, I guess. But what can you do? So let's get into this conversation, guys, about changing cash flow, before I keep going down that tangent. I've got a few parts here I want to run through. What are some of the expenses that might drastically change one way or the other, either to saving us money or to costing us more money? Whichever way you guys want to take this, whatever you've seen with your clients. But let's start it off with housing. I think housing is probably the number one expense in retirement. Correct me if I'm wrong there, but what do you think?

 

Nick: Yeah. I would say for a lot of people that maintain a mortgage past retirement, it's definitely a significant monthly expense. One thing that we are seeing here with the tick up in interest rates over the last 12 months, we had had conversations with multiple clients from 2018 through 2021 about taking advantage of low interest rates and keeping their mortgage and that sort of thing. And for a lot of people, that makes them feel uncomfortable. But to a person, everyone that we've talked to that has done that, now that rates are where they are, they've been pretty happy about that decision and being able to take advantage and lock in those low rates. But for those people that just naturally, with the schedule mortgage that they had, and ended up paying off the mortgage by the time they retired, that drop in expenses is usually a big help. I would say one thing that jumps out that's a reminder that we use for people is ... especially because the homeowner's insurance market here has now gone completely insane. Taxes and insurance don't go away. So I can't tell you how many times we've had a conversation where maybe somebody had a mortgage that was $3,000 a month, and they're like, well, once I retire, that 3,000 a month is going to go away. And we point out, well, hey, about half of that is. The rest of it's for taxes and insurance. So sometimes that drop in expense isn't quite as much as they thought it was going to be.

 

Marc: Gotcha. Yeah. And it's easy to do, even with downsizing, because the market's been high. So it's not always just lowering things just to go to that downsizing piece. John, what's your thoughts there?

 

John: Yeah, I would say the downsizing is a big part of it. Not only if you downsize, you might be able to get some equity out of your house there. So if you downsize, buy a two or $300,000 house, you get some cash that you could do something with. But then you start looking at smaller house, less homeowners insurance, less maintenance costs, things like that, it could really be a pretty significant savings. Especially, as Nick mentioned here, with homeowners insurance. I think mine went up like 60 or 70% in a year, which was ... ... I've heard a lot of people. At first, I thought it was just me. And then I talked to some clients, friends, family, and it seemed across the board that it just shot up.

 

Marc: That's hefty.

 

Nick: Yeah, there's a lot people that are falling between five and $10,000 a year now. For homeowners insurance down here, it's gone just wild.

 

Marc: Well, I imagine the big hurricane added a lot to that, right? That's probably part of it. From last year.

 

Nick: Yeah, yeah.

 

Marc: Yeah, for sure. Insurance companies are like, we got to recoup some money. How are we going to do that? 60% hikes. All right, no more work stuff. Category two on the changing in expenses. I think we probably assume for the most part that no more work stuff means we're going to save a little bit of money.

 

John: Yeah. So this is something that when we do planning, we definitely hit on. We have different categories of current expenses and then retirement expenses, and then we actually go one further and we're looking at advanced age expenses. But this is one where you're not commuting anymore, or at least to work. So depending on what your commute was, you could be saving quite a bit on gas, car maintenance expenses, things like that. And then the big one, I know when Nick and I worked in West Shore, was the lunch expense. Where it's like every time for lunch it's like, all right, where are we going? A good excuse to get out of the office and just get a change of scenery, you find you're going out to lunch every day. That does tend to add up quite a bit.

 

Marc: Oh, yeah. You can spend some dough that way, for sure. So I think in this category, we feel like ... and this one I think maybe drives a lot of people feeling like, oh, I'm going to spend less money in retirement. Right, Nick? I mean, this is one of those things. Well, I'm not doing all those things now, so I'm going to be saving money. But you're also doing more stuff because you don't have to go to work, so you may not save as much as you think.

 

Nick: Yeah. I would also say too, that this post-COVID work from home shift has prepared a lot more people to have a better idea of the expenses that have changed. We do have a fair amount of clients that used to commute, and no longer do. And so they've gotten a peek into what that looks like. And people are creatures of habit. Inevitably, they develop new things that they do, and usually there's other expenses that replace previous ones, but-

 

Marc: There's always something, right?

 

Nick: Yeah. But oftentimes, there are reasonable reductions in some of those work-related expenses.

 

Marc: Okay. Let's go to healthcare. This one here, this one to me seems like this is not going to be going into the positive. This is not going to be putting money back in our pocket. More than likely, this is going to cost us more.

 

Nick: Yeah. I mean, for a big chunk of people, especially if they work at a company that has pretty good health benefits, and maybe they haven't had their kids on their plan for a while, so it's just them and a spouse or them solo. Oftentimes, the shift to what we budget for post-age 65 Medicare-related premiums, oftentimes it goes up for people. So we typically budget about $4,000 a year, and we have a more aggressive inflation number that we use on that. Oftentimes, people come in less than that, especially with a high deductible plan, those sorts of things. I just had this conversation the other day with someone, where they were going to have a pretty substantial jump. And they had worked for the same company for a long time, didn't realize-

 

Marc: You mean a jump in the premiums?

 

Nick: Yes. Yep. They had worked for the same company for a long time. It was big company and had really good health benefits, and premiums were going to go up. So it can be a little surprising that way. If it's somebody that's shifting more from the perspective of, kids recently got off their plan and they're cutting back on ... maybe went from a regular health plan to a high deductible, those sorts of things. It can be a drop. But honestly, I see it more neutral or go up than I see it go down.

 

Marc: Yeah, definitely. John, taxes, let me hit you with this one. This is a big misnomer that's been around for years. That when we get to retirement, our taxes are just generally lower because we're not getting a paycheck, we're not making as much. But more times than not, eight out of 10 times people are not in a lower tax bracket.

 

John: No. Typically, they tend to be in the same, if not, maybe a little bit lower. Because what you're really trying to do when you do planning is you want to keep the person's income where it was while they were working.

 

Marc: Right. You're trying to fill in the ... you're shortening the short shortfall. You're pulling from our assets to make up the shortfall based on Social Security or if you have a pension or whatever those kinds of things are. So you're trying to keep the numbers basically the same, correct?

 

John: Exactly, yeah. So we are trying to keep the numbers the same. And we find a lot of people ... I would say we find the majority of people have most of their money in pre-tax accounts. So what you'll find is when you're pulling out of the pre-tax accounts, you're paying taxes on it. So this is really important when it comes to planning, where you ... and we harp on this constantly. It's a matter of setting yourself up to adjust. So maybe if you have some tax-free money, some after-tax dollars in some other accounts, you can really try to eliminate ... or not eliminate. But try to lower what your taxes are going into retirement. And I'll say one thing that happens quite often with clients, and this is only maybe a year or two that we see in retirement, is they just have a couple of years of just massive expenses where ... we just had someone that's purchasing a second home and they need to pull out of their retirement account. And all of a sudden, it's like in that given year, that's going to be a big tax hit. Or it's a health expense. Or I've had other ones where they want to do a remodel on their house and it's like, well, I got to pull money out of my account. And everything is pre-taxed, so they really get ... we see a significant increase in their taxes in those years.

 

Marc: Yeah. And that's why we want to get tax efficient, if we can. And maybe that's worth looking at, trying to maybe move some money so we don't have that tax time bomb sitting there waiting on us. Some different things. And speaking of actually that, Nick, let's go to the next one here because you can chime in, it fits well with that. Is one of the biggest things we're doing is pumping money, hopefully, especially the last 10 years of working, into our retirement account. Maybe that 401K that John was just talking about. And therefore we're growing those dollars. And that is an expense that goes away once we stop working, we're no longer feeding that.

 

Nick: Yeah. That deferral is usually the lowest hanging fruit of expenses or cash flow going down.

 

Marc: Money back in our pocket, kind of thing, right?

 

Nick: Yeah, exactly. That outflow is usually the biggest drop, especially if it's ... if you're talking a couple that is essentially, maybe they're both maxing out or pretty close to maxing out, they're saving around 25,000. That's $50,000 a year. Granted, that's the money that they're used to living on anyways.

 

Marc: Yeah. Because we weren't seeing that. When we're working, it's going straight to the paycheck ... or straight to the 401, for example. But now that we're not working, we also don't have the paycheck. So to me, is it truly a savings or is it a wash, because you weren't seeing it before either? You know what I mean?

 

Nick: Yeah. I think for a lot of people it's a wash. Realistically, in the day-to-day setting and from a lifestyle perspective, it tends to be a bit of a wash.

 

Marc: Okay. Yeah.

 

Nick: Yeah, it's more of an on-paper reduction, more than anything.

 

Marc: Makes sense.

 

Nick: And in theory, when you start ... if you want to nitpick a little bit. The money that you defer into those plans, you still pay payroll taxes on it. So there's a little bit of a savings there. So that's something that can factor in. And one of the changes that fits in with both the tax and retirement things is a lot of times at that point in time, they're no longer claiming kids. Maybe the mortgage is paid off. So from a deduction perspective, there's also a change as well from the standpoint of what they're able to deduct versus what they can deduct in retirement.

 

Marc: Okay. And so what we're doing is we're talking about these categories here on understanding how our expenses are going to change, whether it's to the plus or to the minus. And then we'll talk a little bit more later on about how that's going to affect us in our overall expenses and some things to cover in ways to be more efficient in that. So let's continue on with a couple more categories here and then we'll wrap it up for this podcast. So we went through housing, work stuff, healthcare, taxes, the retirement savings account when we're no longer feeding the 401 animal. John, so you mentioned earlier travel and leisure, when you were talking about there's different things we're going to spend money on. So if every Saturday is the day I spend the most money, well, guess what retirement is?

 

John: Every day seems like it's a Saturday.

 

Marc: It's a bunch of Saturdays, right?

 

John: Yep.

 

Marc: It's Groundhog Day.

 

John: The more time you have, you find yourself trying to fill the gap of what to do. And we see a lot of people that are, if they're like golfing, they tend to be golfing a little bit more. Or fishing or whatever it might be. I'll see-

 

Marc: But that's the point, right? That's the point of retirement. It's what we're striving for. But I think the scary part is, is if we haven't budgeted for how much we're ... the activity. That's when we can maybe shortfall ourselves.

 

John: Exactly. Yeah. That's where it's important where you're doing a cashflow analysis for retirement. Like I said, we typically look at retirement expenses. We'll look at what the person does for hobbies and try to estimate, okay, this is what we can expect. And you always want to go over the amount, you never want to go under.

 

Marc: I was going to ask you that. Yeah. You want to-

 

John: Yeah, you always want to go over, because-

 

Marc: ... inflate it a little bit.

 

John: Yeah, exactly. I'll tell you this ... and my wife doesn't listen to the podcast. When she's at home more, I start to notice my Amazon bill goes up and packages end up at the door. So when there's a lot more downtime, you tend to say, okay, what's out there? Oh, let me go run to the store. Let me go do this real quick. And all those things add up to just added expenses, which fine-

 

Marc: Yeah. Well, sitting on the computer or the phone, you're just like, I'm bored, I'm not doing anything. Next thing you know, you're on some sort of shopping site because you're like, I was thinking about this or that, or a new set of golf clubs. Right, it's easy to do.

 

John: Home projects because Pinterest is giving you all these different ideas that you should be doing with your home. So yeah, all those things are up.

 

Nick: All right, John. This is not a therapy session.

 

Marc: No, but I mean he's right, though. I mean, it totally ... and people do that.

 

John: So Marc, that's coming from the single guy right now.

 

Marc: Right. Yeah, exactly. Yeah, I was thinking the same thing. And you mentioned, you were talking about projects, DIY projects or Pinterest. We're right in the middle of rebuilding ... I'm building a billiards room here next to my office for the pool table. And it's just, scope-creep has taken over. It's like, oh, I can ... I factored in the budget. I'm like, I could do it for this amount of money. And I'm way over budget. And that's, again, if you're retired ... I'm still working. But if I was retired, that could be a real problem. If I let scope-creep get in there and I'm spending 25% more than I budgeted for this project, that could be an issue. So you want to make sure that you are inflating it, to your point. Puff those numbers up a little bit, just to be on the safe side.

 

Nick: Oh yeah, big time. I don't think I've seen anybody come in under budget on anything in the last three years.

 

Marc: Yeah. And that's with professionals, let alone doing it yourself, right?

 

Nick: For sure.

 

Marc: Okay. So that's travel and leisure. So the last one here, last category, insurance. Many people, guys, walk into retirement saying, well, I don't need insurance anymore. That's also that old standard, as far as the financial services world. Well, who needs ... why do you need insurance if your kids are grown and you don't have to replace your income because you're not worried about sending them to school. Or all that kind of stuff that you guys have heard probably a million times.

 

Nick: Yeah. So we'll see ... one of the most common insurances that go away, whether it's at retirement or early in retirement, is life insurance. So we obviously emphasize the fact that a death early on in retirement is the bigger risk, especially if there's outstanding debt, those sorts of things, versus later on in retirement. So sometimes we'll have people that, maybe they've got three to five years left on their term policy and the premiums aren't prohibitive. And we'll just them keep the coverage because there's still a mortgage, or just that additional money if something were to happen would be a big boost to the surviving spouse. But disability definitely goes away because disability insurance, by definition ensures your ability to work. So if you're not working, then you're not insuring anything. So that's something that drops. And then some of these supplemental policies that maybe were provided by the employer, aren't portable and you can't take them with you anyway. So some of those things will drop off. So that's definitely something that can be adjusted and adapted to reduce some of the costs.

 

Marc: Well, I think for every situation, insurance is one of those questions, John, that goes either way. Some people may not, when you guys are developing and looking through the plan, maybe insurance isn't needed. But then again, maybe it is. Or maybe they're using an insurance policy for the cash value policy side of things or whatever. So this one is one I think could go either direction.

 

John: It definitely could go either way, it really depends on the individual. And like we were just talking about here, each person, whatever is important to them will dictate whether your insurance is going to be going up or down. That's really what it comes down to is, each individual, what they value and what they want to protect with insurance and what they're ... oh, okay. I'm okay without it.

 

Marc: Well, and that's a good way to think about what we're going to get into for the next podcast, is really assessing must-haves, nice-to-haves, things of that nature. And then how other aspects in the financial services world could affect those categories we just ran down. So we're going to wrap it up this week. So again, these are just the expenses categories, and some major ones here to think about how they may change to the plus or to the minus with our cash flow in retirement. And we'll be back next week with the second half of this conversation. So do yourself a favor, if you haven't done so yet. Reach out to the team if you don't have a strategy or a plan in place, and get started with a consultation and a conversation for yourself. You can find the guys at pfgprivatewealth.com. That's pfgprivatewealth.com, where you can get started today on a strategy for yourself. Reach out to John and Nick there. And guys, thanks for hanging out. I'll see you next week ... well, in two weeks on the podcast. Nick, have a good one.

 

Nick: See you.

 

Marc: All right, John. Thanks, buddy.

 

John: Sure.

 

Marc: And I'll catch you later. We'll see you guys here on retirement Planning-Redefined, with John and Nick.