Solving Our Own (Spending) Problems

Yesterday I had a quick but interesting chat with an acquaintance about spending in retirement and the issue that too many people have with spending beyond their means. In the conversation I think I hit on a couple of things that could be useful for people who grapple with this issue.

Take a retired person with an expensive hobby like car restoration, that is buying something old and or sentimental and doing whatever is needed to make it look like new. This could include replacing a lot of the moving parts, the interior and painting the car. This is a labor of love that can be expensive. This same retired person might have a retirement portfolio that provides some portion of their income along with social security. Depending on their involvement in their portfolio they might be aware of the fluctuations of their portfolio and get nervous when it goes down.

If our car restoring enthusiast retired making $10,000 per month they would have been making a fine living but would not necessarily be rich (eye of the beholder on that number). That sort of income probably means the person is living $6500 lifestyle in that maybe about $2000 goes to state and federal taxes and maybe $1000-$1500 to savings. If the numbers in this example are reasonable and this person is collecting $2000/mo from social security then the portfolio needs to have $1.35 million to have a 4% withdrawal rate cover the $4500 per month (taxes in retirement could complicate the numbers but still) , assuming our active hobbyist wants the exact same lifestyle dollar wise.

So this person either has that much or he doesn't. To have the best chance of having enough money the withdrawal rate should be 1% per quarter or less, the further the person goes above that 1% per quarter the more risk of running out of money. If our hobbyist still has a mortgage (more and more retirees do these days) then $6500 might be a nice lifestyle but it is not a lot of money and the restoration projects loom large for this person.

The thing I stumbled upon in my conversation yesterday is that a person in the above situation needs to have their own moment of clarity on their hobby or whatever anyone spends money on beyond the basics. Advisors or concerned family members or whoever else can try but it is very difficult to get through. Perhaps this is obvious but the way it came out as I was saying it was new to me and I think very important. Generally there is a mismatch between what we have saved and what we need to live on in retirement and cover the one-offs that seem to come every month not to mention hobbies like car restoration or buying an RV or an Indian Motorcycle.

People running out of money is certainly nothing new but I think it is reassuring in a way that difficult though it may be a self imposed austerity can be a difference maker in the success or failure of a financial plan. Being in the position to decide to spend less on Civil War reenactment (to pick another example of a hobby that might cost money) of course presumes that there was retirement saving during the working years and there is enough saved to have some shot at a workable plan.

Some of the average 401k balances that are reported (they all seem to be less than $100,000) are not really enough for a retirement plan. Even $200,000 comes far short as $8000 is not a workable number for most folks. But people who made the necessary decisions early on to try to save properly can be in a position to make decisions as opposed to having their circumstance dictate everything.

Someone who needs $700,000 to make their plan work the way they would like but who only has $600,000 is probably in a position to decide what is sacrificed and what stays in the lifestyle. One way where people get in trouble in this sort of scenario is when they think $600,000 makes them rich. It sound like a lot of money alright but using the 4% rule it generates $24,000 per year.

Another part of the thought process here for the spender which came from this conversation is that there are three variables here; the portfolio, the market and personal spending habits. Of those variables what do you have the most control over? Clearly the third one--the context here is spending habits, getting sick or the like is certainly something people need to prepare for but is a different context. So although it can be very difficult, some discipline where discretionary spending is concerned (obvious comment) can be a difference maker but to repeat from above the spender needs to come to this on their own. To apply a generic bit of wisdom from our friend Bill; you can figure it out now or you can figure it out later but if you can figure it out now you'll be much better off.