Afford Anything - Why Your Retirement Math Might Be All Wrong — If You Follow the 4% Rule

Episode Date: November 15, 2024

#558: What happens when you spend three decades talking to retirement experts? You learn that most of what people think they know about retirement planning is oversimplified or wrong. Christine Benz, director of personal finance and retirement planning at Morningstar, joins us on the Afford Anything podcast to share what she's discovered after 31 years of interviewing experts across personal finance, tax planning, and Social Security. One key insight: The standard advice about withdrawing 4 percent of your portfolio annually in retirement misses the mark. Real-life spending isn't that simple. In your 60s, you might spend more on travel. By your 80s, healthcare costs often rise. Benz suggests creating separate "pots" of money for different purposes - like a travel fund you aim to deplete within your first decade of retirement. Want to protect against market crashes early in retirement? Benz recommends keeping 5-8 years of planned withdrawals in cash and high-quality bonds. This prevents having to sell stocks during downturns. We talk about why retirement doesn't need to be all-or-nothing. Instead of going from 40 hours to zero, Benz describes how many people benefit from a phased approach. This might mean keeping the parts of your job you enjoy while dropping the rest, or finding new ways to use your skills. The conversation shifts to housing choices. While many assume retirees move to Florida or Arizona, the data shows most stay put. Those who do move often end up near their oldest daughter. And while single-family homes tend to make people happier until around age 75, apartment dwellers report more satisfaction after that — largely due to increased social interaction. Benz shares her own retirement planning process. Despite being a retirement expert herself, she works with an hourly financial planner who tells her she'll likely struggle to spend as much as she could in retirement. It's a common problem — after decades of saving habits, many retirees find it psychologically difficult to spend their money. The interview wraps up with a discussion about relationships in retirement. Research shows that while older adults often have smaller social circles, these relationships tend to be deeper and more meaningful. They've pruned away the "good enough" friendships to focus on their closest connections. Benz's insights come from her new book "How to Retire" and her work at Morningstar, where she creates free model portfolios and hosts The Long View podcast. Beyond the financial aspects, she emphasizes that successful retirement planning involves thinking about purpose, relationships, and how you want to spend your days — not just your money. Timestamps: Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. 0:00 What 30 years of retirement expert interviews reveal 1:34 Why spending in retirement is harder than saving for it 3:12 Beyond money: need purpose, not just leisure 4:00 The challenge: planning for an unknown time horizon 8:52 Should market fears delay your retirement? 13:42 How much cash and bonds to keep safe 15:49 When bonds don't protect against stock crashes 18:33 Phased retirement: keep what you love, drop what you don't 29:24 Take mini-retirements throughout your career 33:20 Spending shifts: from travel to healthcare costs 46:14 Why most retirees don't actually move 57:31 After 75, apartment living beats houses 1:00:42 Friendship patterns change: quality over quantity 1:04:58 Virtual vs real-life connections 1:06:25 Where to find more info For more information, visit the show notes at https://affordanything.com/episode558 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Imagine that you spent 30 years talking to people who were experts in personal finance and retirement planning. What would you learn from doing that and what distillation of knowledge would you then want to pass on? We're going to learn that today from Christine Benz, the director of personal finance and retirement planning at Morningstar. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade-off, and that applies not just to your money, but to your time, your focus, your energy, to any limited resource. So, what matters most? This show helps you find that answer. We focus on five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship.

It's double-eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. I help you prioritize. And I'm here with Christine Benz. Christine. Paul, it's such an honor. You know, I'm a super fan of yours, so I'm very excited to be here. Thank you. Over the last 31 years, you have spoken to this wide range of experts across fields that are as broad as personal finance, as more tailored as retirement planning, or as granular as social security experts. What are some of the biggest lessons that you've learned from that?

One is that retirement decumulation is just wholly different from accumulating assets and saving pre-retirement, that you have to figure out how much you can safely spend in retirement, which is no mean feat when you think about the fact that it's an unknowable time horizon. and then also the complexion of the investment portfolio needs to change because you are potentially drawing down from that portfolio, which during a period that might not be great for stocks. So you need to build a portfolio that will be durable to make sure that you're not pulling from assets when they are in decline. So those are a couple of the key financial lessons, which make me really want to focus on this area. And then I just feel like there are whole realm of considerations that fall into the non-financial bucket. I think people often come into retirement without a vision for their retirement. They might

have pent up demand for leisure or relaxation or sleep, but they may not have given enough thought to what will be kind of my animating force or forces through my life that will be a counterpoint to that leisure that I hope to pursue. I think too many people have that bucket list of leisure, which is great, you should. But you also need a vision for how you will spend your days and you need to put in place healthy habits to support your ability to pursue both the purpose piece as well as the leisure pursuits. Right. So what I've heard in your answer was a big focus on withdrawal. Yeah. It seems what I'm hearing is when you are saving for retirement, the path is relatively straightforward. You make money, you save it,

you invest it, end of story. You try to asset allocate the best you can. Right. Try to asset locate the best you can. Right. But for the most part, it's fairly straightforward. But what I'm hearing you say is that it gets a lot more complicated when you're trying to withdraw because now that bucket of money really is fixed. And this is what you have to work with and you better not screw it up. Exactly. It may grow over your retirement time horizon, but it's not guaranteed to do so. So the challenge is arguably the hardest one in all of financial planning because you don't know the time horizon. So you might have some rough idea of how long you want to continue to work. And most people's health will support them through that period.

but in retirement you're planning to draw down over an unspecified, unknowable time period. You might have some sort of signposts into what your health looks like, how long your parents lived, and things like that. But for most of us, it is a real wild card. And that's one reason why the retirement spending problem is such a complicated one. If someone's retirement will be just 10 years, well, of course, they'd want to try to maximize their spending, spend more, they should spend more. If someone's retirement time horizon is more in the realm of 25 or 30 years, which is kind of the standard that we use when we think about retirement planning,

we need to be more conservative. And then a lot more things can go on with the market over that longer time period, too. You could have crazy levels of inflation or no inflation. You could have a great equity market or poor equity market. So just a lot of variables swirling around there. that makes it very difficult to get your arms around. And it's actually, frankly, Paula, one reason why I've become an evangelist for people,

even avid DIY investors, at this juncture, just get a second set of eyes on your plan on what you're thinking about with some sort of professional. And it doesn't have to mean that you're signing on for some ongoing portfolio management that you might not need. But it just is sort of that other check on how you're thinking about. things. My guess is that for many of us, that trained professional will point out a blind spot

or two that we might have missed, even if we've been very, very engaged with this stuff. Right. Yes, a sanity check, say to speak. Exactly. There's a lot that we could go into here in terms of portfolio construction and withdrawal strategies. Let's start with the question for people who are currently near retirement. We know that sequence of returns risk is one of the biggest risks that are retire you can face. And for those of you who are new to this community, sequence of returns risk is the risk that the market goes down shortly after you retire, which means you're drawing down from depressed assets, and that has a permanent ripple effect. If you're worried that we might go into a recession in the next year or so, should you delay your

retirement? Well, that's a really personal question. I would say for most people, they would want, to let lifestyle considerations dictate a choice like that. But I would say that you have two main things in your toolkit to help protect you against sequence of return risk. So if you happen to retire and a lousy market environment shows up just as you retire, you can do two things. One, you can try to shrink your planned withdrawals from your portfolio to help forestall withdrawals from investment assets that have fallen. But the other big, thing you have is the opportunity to asset allocate and build yourself a bulwark of safer assets that you could pull from in that environment. So some combination of cash and high quality bonds, I think,

would be the main things. And my thought is for most people, something like five to eight years worth of portfolio withdrawals and investments like that can sustain you through many types of even big, bad equity market downturns, you'll get through okay if you have roughly that much set aside in cash and bonds. So think about those two things. I think it can be empowering rather than fearful and thinking about, well, I'm going to completely change up this plan that I had. Think about the things that you have in your toolkit to help mitigate those risks. And those would be the two main ones. Don't you typically advocate that people have what 10% of their portfolio in cash? Well, it depends on whatever withdrawal rate you're using. So you would use that as kind of

the yardstick for determining, so say someone's using a 4% guideline. Right. I would typically advocate for two years worth of those 4% portfolio withdrawals, so 8% there. And then roughly five to eight years of high quality fixed income from there. So the funny thing with that, which is kind of the bucket system that I often talk about, is that you end up in many cases with kind of a 6040 portfolio at the end of the day, where if you've got, say, eight years in high quality bonds plus the two years in cash and you're using a 4% withdrawal, that's 40% of your portfolio. So it's a fairly standard acid allocation. Where I think it gets really interesting is if someone is, say, a tenured college professor and their investment portfolio is mainly there

to provide maybe sort of very discretionary spending, big trips or something like that, but the pension is supplying most of their cash flow needs. In that case, cash and fixed income portfolio could be that much smaller because that person's really taking quite limited portfolio withdrawals. But I like that general thought pattern as a means of informing what is a sensible acid allocation given what I have going on here? Because I think acid allocation can often seem just really black boxy to people. They're like, well, I guess I should be 50-50 or 70-30, but backing into it by actually looking at your anticipated portfolio withdrawals and even starting before that where you're looking at your actual spending in a very granular way. You oversee a 10-year period where you're saying, okay, I think I want to buy a car in year three and take this big trip in year four, whatever.

Really mapping out that spending can help inform your spending rate. You mentioned a bucketing strategy. Are you then a proponent of the bucketing strategy in, we'll say, five-year increments as you plan through a 30-year time frame? The way I think about it is just sort of maintaining that 10-year. runway throughout your 30-year retirement. So your equity portfolio might shrink over time, but you would want to try to give yourself that 10-year bulwark because we know stocks are extraordinarily reliable if you have a time horizon of at least 10 years. Like 90% of the time, maybe 88% of the time depending on rolling 10-year periods, stocks will be in positive territory.

But when you shrink that rolling time period to three years or five years, your probability of success starts to get lower. And so that's why I anchor on sort of 10 years is a good framework to protect yourself against another lost decade of stocks. So we had one from 2000 through 2010 where U.S. stocks basically just flatlined for a good decade. So I think 10 years is kind of a good sort of back of the envelope way to think about how much of that bulwark you'd want to maintain. And I would certainly maintain it throughout retirement, even though the equity portion might shrink. Now, you talked about having a high quality bonds, high quality fixed income portion of your portfolio. How do you deal with the reality that we all learned in 2022, which is that stocks and bonds are not necessarily inversely correlated as many of us. previously erroneously assumed. Yeah, it was a really, I think a great teaching moment for many of us, but it was a very contrary sort of experience in that we had had many, many different market environments where bonds were terrific ballast for stocks, where when stocks went down, bonds, high-quality bonds especially did very well.

2022, the same thing that was bugging the stock market was bugging the bond market. So rising interest rates were hurting market participants in both markets. And that's why cash, I think, comes in handy. In fact, I felt like prior to 2022, I had been a bucket evangelist for a long time, but I felt like I was always fending off criticism like, ah, the cash bucket's such a drag on the portfolio. you, I felt like 2020 shut everyone up because it's not as simple as stocks and bonds. I do think that you need liquid reserves to protect yourself in such environments, which admittedly are pretty rare, but the idea is that you aren't having to pull from bonds when they're depressed. So for me, I thought it was a great illustration of why you would want to maintain some liquid reserves on an

ongoing basis. And the same goes for people in accumulation mode. as well. It's sort of the intuition behind having that emergency fund, not in bonds, but just in something really liquid that you can tap in a pinch. Right. If you're in the accumulation phase, but particularly if you're in early or mid accumulation, if you're still many decades from retirement, would a barbell strategy make sense? Equities and cash, but no bonds. Potentially, and I will say, Paula, that is something that my husband and I have mainly done throughout our lives. And it was also probably a big mistake, actually, in hindsight, in that cash had a major, major opportunity costs for the better part of the past couple of decades. Bonds, even though interest rates were really

low, enjoyed some very nice price appreciation during that period. So when interest rates went down, bond prices went up. As a cash investor, you don't enjoy any of that action at all, right? You just have to settle for whatever lower and lower yields are on offer. You're not putting yourself in line for any of that appreciation potential. Yeah. So I think it can make sense, but there isn't potentially an opportunity cost, especially in a declining rate environment. And also over time, even though bonds do court some volatility,

the return potential is better than you will have in cash investments over longer periods of time, which I think if I had it to do over again, I probably would have made more room for bonds. And certainly as I'm getting closer to retirement, all of my new contributions are actually going into bonds, which it feels a little weird. But I'm trying to kind of rectify my portfolio's asset allocation. How far are you from retirement? Good question. I'm very much thinking kind of a phased retirement morning star has been so lovely for me in terms of letting me very much work on what I want to work on.

So the job that I do today, it's so educational and kind of has. a quasi-consume community service feel, which is exactly where I want to be. So I feel like if I can continue doing some version of that work for a while, that'll give me that sense of purpose. I was talking to Scott Burns, who's a retirement expert, about his own retirement. He's in his 80s now and tried to retire. And he made such a clarifying point to me where he said, I was stocking food pantry shelf. one day. And he said, I really enjoyed that work. I enjoyed feeling like I was making a contribution in my community and getting out there. But he said, I realized that my highest best use in the world was probably not doing that, that I probably should do some version of my life's work longer. So he

continues to write. He continues to educate. And so that was such a clarifying moment for me. like why would I completely step away from work and try to reinvent myself in some sort of volunteer capacity or just being on boards or whatever probably could continue to do something like this. So it's kind of an open question. And the other thing I keep in mind is that we don't know what the future holds. I think people sometimes are forced to stop working for reasons that they didn't foresee. So I want to create a plan that is kind of supple enough to flex if our plans change, if my husband's and my plans change. Yeah. You used the phrase phased retirement, and I want to dig into that a little bit because that's not something that we often

hear about, but it's an approach that could benefit a lot of people because we often in dialogue think of retirement as this binary. Exactly. Zero one. You're either working 40 to 50 hours a week, or you're working zero hours a week. That seems rather extreme versus a more phased retirement. Can you talk about some of the different models? Yeah, I've come to be a huge believer in this idea of transitioning gradually, that on-off switch doesn't work for a lot of people, for a couple of reasons. One is that a loss of identity can accompany true retirement where you're really hanging it up.

And I think that's especially true with people and sort of, sort of high status professions, attorneys, doctors. But to be true for a lot of us, I think I might struggle with that when I eventually retire, like walking around like, hey, do you know who I once was? That you'll have a little bit of that sense that you've lost something. Right. So the issue with faced retirement is sometimes people interpret it too literally that they think it's like, okay, now I go from 40 hours to 30 hours or 20.

And maybe that's what you do, or maybe it's just that you have some aspects of your job that you really liked, but you do not wish to continue on with that employer. But maybe you just want to carry forward those one or two or three things that you really love doing in your job in some other fashion. Maybe it's something that's completely different from your day job. But the idea is that in those years leading up to retirement, you just start taking some mental notes of like, that was a great day. And one example for me was I was planning this Bogleheads conference and reaching out to connections that I've made, people I really love in the financial planning investment space, asking them to be part of the conference. So there was kind of a networking aspect to the day. And I was also working on a book project. and it was a Friday and I had lunch with my husband and I was like, this is what I want to do.

So just kind of take some mental notes of good days like that, whatever that is for you. Yeah. Also the bad ones or the thing you see on your calendar where you're like, oh, a day full of meetings, or maybe you love meetings for all I know, but take note of those things that give you that sense of dread on Sunday night when you're looking at your calendar for the week ahead, cast off those things. I was talking to Carl Richards, the behavioral guy, the sketch guy, such a, and he's like, make a stop doing list. And I think you got this from someone else, but I always attribute it to Carl because it was just like, what an amazing idea. Just start taking those mental notes of things that you really enjoy about work.

Maybe you hate it all, in which case the hard stop is the right thing for you. but many of us do have some things we like about our jobs. Relationships for many of us is a big thing. Right. So you want to make sure that if you are doing that hard stop, you're finding a way to supplant those work relationships later in life. I think starting to make those mental lists can help you figure out what that phased retirement might look like for you.

Someone made the point to me that the way we work is all raw. Working is good for us. The way we work in this country is all wrong. We just hit it too hard. We burn ourselves out. We probably should give ourselves breaks more often really throughout our careers and not come into retirement just completely wiped out. Like mini retirement.

Exactly. Take sabbaticals once every few years. If you can, Morningstar offers a sabbatical program, which has just been such a fabulous opportunity. What's the program like? Tell me that. So we've had it. We're way ahead of our time. We've had it for really the whole life of the company as I've known it, where if you have four years of service, you get six weeks just sort of on, but just untethered from the workplace. The idea is that you are very much unplugging. We've had people doing really cool things like translating texts from Latin, you know, things like that are climbing mountains, but also just people who want to spend. six great weeks with their kids. So people have had a lot of great experiences in sabbatical. I've had my share, and it's been some of my favorite times to just really think about what I want to do in my career and in my life. So I recommend a sabbatical if people can possibly take them.

I call that retiring early and often. Exactly. I've called them. I've called them my foetirements, my sabbaticals. But it has been a great opportunity to reflect on some of these things. One thing I will say, though, is that a lot of this is very much in the domain of highly educated knowledge workers, the ability to write your own ticket on a lot of these things. Unfortunately, it's pretty bifurcated in our society where people have jobs that do not give anything like that sort of leeway. So it's a luxury good for sure, and I want to acknowledge that.

Yeah. I do know people who sometimes if they're between jobs, if they have sufficient savings, they will treat the time in between jobs as a mini-retirement. So if a employer isn't unwilling to give that, then that transition between jobs becomes their way of creating that for themselves. Yeah, exactly. And I think that's one of the reasons that people doing contract type work has become more. popular, that people have the flexibility to pick and choose, to take advantage of those breaks between contracts. So I love that idea. Right.

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That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments of Fifth Third Better. You mentioned the Boglehead's conference, and I realized I didn't actually. introduce where we currently are. So for those of you who are watching on YouTube, you'll see we're sitting in the same room together. We're in Minneapolis. We're in Minneapolis. Yes. And we are at the Bogleheads conference. I'll let you explain it. The Bogleheads is a group of individuals who

are committed to the principles of Jack Bogle, who founded the Vanguard group. And they're mostly committed to low-cost index-based investing, but we just have this fabulous community of individuals who share information. This conference is about education, but it's also about community getting together with like-minded people. There's sort of an ethos of thrift that I think infuses this community. They're a really smart, thoughtful, lovely group. And I'm thrilled that you are part of the conference, Paul. It's terrific to have you here. The caliber of speakers who we have brought to this conference, I think, is second to none. And the best part is that everyone is volunteering their time. We don't have any paid speakers for this conference. There's no booths,

no pay to play. So it's just purely educational and feels really altruistic and good. So I appreciate you being willing to be here and lending your expertise. Oh, thank you. It's incredible. To be, in a place where you've got 500 people who are index fund enthusiasts, these are my people, you know? Mine too. Yeah. I remember meeting Jack Bogle. I was an investment analyst at Morningstar for many years.

And I remember meeting Jack quite early into my tenure as an analyst and sitting in a room and thinking, that guy, I want to be on his side of whatever we're doing here. and we've just been kind of an evangelist for this way of thinking about very minimalist, very low-cost investment products. And it is a way to free yourself up to focus on, A, other things that you love to do, and then B, maybe other aspects of your financial life that are more impactful, like things like tax planning. Right. And one of the many, many things that I love about low-cost index investing is that among its many benefits is, that when you take obsessing about what you're investing in off of the table, you free yourself up to focus on your contributions and how can you increase your contributions. And that is truly

the biggest determinant of your investing success. A hundred percent. Yeah. You want bigger returns? Make bigger contributions. Exactly. Exactly. You get to see how the various levers move together. And then one other thing I love about indexing is that it actually frees up. your mental bandwidth, there's just a whole category of news flow that you're like, yeah, I don't care that much about the interest rate changes or what the election might mean to my portfolio. I'm putting all of that in the too hard pile and I'm going to read a book that I find interesting or whatever it might be, that it does let you set aside a whole category of information that you're just not going to monkey with. And for me, that's just incredibly

fringing. Yeah, absolutely. So you wrote this book. It's called How to Retire, which when I saw the title, I was like, how do you retire? That is a big question. What's interesting to me is that you've taken this very, very big topic and in some areas you've broken it down to very granular levels like Social Security, right? But there's also a big component where you talk about figuring out what's next. Part of the challenge of retirement planning is that what you want to spend money on in your first five years of retirement, which are probably going to be a lot more travel heavy, years one through five are probably going to have a lot more travel than years five to 20. Years 20 through 30 might have more medical expenses. So there's this nebulous part of figuring out.

you can't just assume that your current expenses, the standard, what are my current expenses or what are my ideal expenses, let me 25x that, that's the amount that I need. But that doesn't really make sense in the context of dynamic spending. And so much of retirement planning is forecasting that dynamic spending. And there's a lot, there's a lot that you do unpack there. But one of the things that you talk about is having pots of money. Yeah. Rather than ongoing budgets. Yeah. John Guyton talks about that. He's a financial planner and he's also a researcher who did some great work on dynamic spending strategies in retirement where you are looking at what's going on in your portfolio and what your withdrawal rate would look like relative to that portfolio and you're

kind of doing recalibration along the way. So he's worked a lot with clients on spending. And his point, I thought was such a good one in the book, which is that you're spending early on in retirement, and several people made this point, is, as you said, Paula, apt to be the high spending part of your retirement with his clients. I think he gives them like a travel pot. His advice is, I hope you deplete this within the next 10 years, if they're retiring at 65 or something like that, because the data would suggest that we do tend to see a decline in spending as people move through retirement, it averages out to be roughly a percentage point less than the inflation rate. We see this decline, and David Blanchett's research points to this decline, kind of continuing through the early

80s period, and then we see spending, in many cases ticking up in the very latest years of retirement, and that's often the uninsured health care expenses, especially long-term care expenses. So spending throughout retirement is by no means this static inflation-adjusted thing that is the same year after year, which is why, you know, when we think about static spending rules like the 4% guideline, they're kind of a straw man really when approaching this problem because people do not actually spend this way. And then invariably, we all just have lumpy outlays, whether we're working or not working. You have things where you have a lot of home repairs that hit up. once or you've got to buy a new car or maybe you have a lot of travel plan or whatever. It's not

all going to be equal throughout your retirement years. So I think this idea of a travel pot or a discretionary pot can be really empowering. So maybe you've got your static spending mapped out the things that probably won't change a lot, but then you're giving yourself this discretionary bucket. So is that the approach then that someone should take? Because so often when people are first introduced to this, particularly in the fire movement. What we learn is 25X your annual spending is the amount that you need. And once you get that, then you just 4% withdrawal rate and live happily ever after. That's the introductory right, which always makes me nervous. I should say. Exactly. But then, of course, the reality is, as we've just talked about, that your spending is

dynamic. If you graph your life and each year, you're spending at any given year as a different data point, then the year in which you form your fire goal is just one randomized data point. Exactly. So to tether everything to a randomized data point, that's never made any sense to me. Right. So would the approach then be, do that with regard to your, the more static aspects of you are spending, broadly speaking, groceries adjusted for inflation and assuming that your family size doesn't change. I'm trying to even think of what would be that job. Housing taxes would be more or less predictable.

Health care outlays, certainly utilities. Even healthcare rises at rates that are higher than inflation. Yeah, it has modulated a little bit, though, in recent years. There's a handful of expenses that you could put into those staff. categories, but it seems like a lot of your spending would be dynamic. Yeah. It's important, I think, to map out actually what your spending looks like. Don't just do a point in time analysis. Whether you have a traditional time horizon for retirement, you know, of 25 or 30 years or it's longer, at least spend some time looking at the first 10 years. You probably have some clarity

around the things you want to do, get a spreadsheet where you are looking at each of those categories. You're anticipating some of those lumpy outlays, whether happy or less happy, but you are looking at spending on quite a granular level. I think that's a very valuable exercise that probably should precede how you structure your portfolio, how you determine how much to withdraw and so forth, that exercise of actually looking at your budget and how it might change in the first 10 years at least. There was someone you interviewed who had three different ways of assessing your spending. I'd never heard of these three ways. I thought it was a very interesting approach.

That was the John Guyton chapter where he talks about how you really should try to be quite specific about it. I loved his point that this is not back of the envelope time, right? Okay, he says, first, number one, you could use software to track what you spend and categorize it. Duh. Okay. Right. Second, you could use a good old simple budgeting spreadsheet divided into categories. But then third, and this is the one that I thought was interesting, get a hold of your last six to 12 months' worth of checking account statements, note the balance at the beginning, add up all of the monthly withdrawals, then note the balance at the end.

The difference is exactly what you spent. What struck me when I read that, it seems to me like to arrive at the best answer, you do all three. Yes, right? And then with all three of those answers, you can see how closely the answers align with one another. Let's say that two out of those three answers are quite similar, but one of those three methods gives you an outlier answer. All right, now we've got some further unpacking to do. But by contrast, if you do all. three, and all three give you a very similar answer, okay, now we can have a high level of

confidence in that spending rate that we use moving forward. Yeah, exactly. I talked to John Geithen about this just recently in the context of his clients and their inflationary experience, and his point was, because we did this work so carefully heading into retirement, what we saw was actually the change in their spending over the past couple of years as inflation went higher almost exactly matched the inflation rate, which he viewed as a victory because they had been so careful in terms of forecasting spending. Wow. Speaking of spending, a lot of people, again, back to the fire movement, have a hard time

of spending. It's very hard to move from the accumulation phase to the, you know, when you formed a lifelong habit of being frugal and investing and accumulating. it's hard to flip the switch. Totally. I feel like this has been underdiscust, and maybe it feels a little bad to talk about it because we have a whole segment of our population

who's way under-saved for retirement, who will come into retirement exclusively reliant on Social Security. So it feels like such a high-class problem to even address. I can't tell you, Paula, how many times I've been out speaking to a group of older adults and some man, apparently in his 80s, will come up and say, I spend just 3% of my portfolio a year, regardless of what the balance is, this is how I do it. And I think, well, I hope that you have a good quality of life. I hope that's enough for you. But to me, there are just all these illustrations of people spending less than what they could do. And I think

it's for exactly that reason you put your finger on it. You build your identity as a saver, as an investor. You see that balance grow. It feels bad to see the funds go the other way. I wrote about this on morningstar.com not so long ago where I had sold some stock, some Morningstar stock that I had and plowed the money into our taxable brokerage account. And it hadn't, yet been taxed. And so then we had this enormous tax bill due to the gains and the stock. But I'm like, but it's over there in the brokerage account. I did not want to tap it for this tax bill. We're so used to just there being this one-way direction paycheck into savings and investments, that the thought of the funds coming out of that account, that that balance would ever go

lower was very uncomfortable to me. So I think I'm going to be one of these people, grappling with this issue of giving myself permission to spend what is a reasonable amount. And my husband and I work with a financial planner who we love. She's an hourly financial planner. She's like, you're not going to be able to spend what I think you can spend in retirement. She was like, I know you. It's going to be a struggle. So how do we give people permission to spend what they actually could spend? I think it's a work in progress, but I think it's something we need to be talking. about. Right, right, because it brings up so much anxiety to see your accounts dwindle. Right. And part of it is the term spending, I think. It's a lot of us are kind of judgy about it. Like, I think people assume that if we're

saying you should spend more, it means that you should go out to dinner every night or buy a new car every year, something stupid that I wouldn't suggest most people do. But it could mean that maybe you're giving a little bit more during your lifetime. that that would count as spending, but it's not spending on you. It's spending on seeing your money work for you during your lifetime versus leaving your kids' money when they're in their 50s and 60s. So I feel like we need to come up with a different term than spending because I think some people think spending equals frivolity and it doesn't. One of the things that you talk about when it comes to thinking about retirement are what Maria Bruno refers to as the three-housy

Have you had enough? Do you have enough? And will you have it? Can you elaborate on that? I love that piece of wisdom, which I think she heard from someone else, but repeated for the book. So the have you had enough sort of means like, how are you feeling about work? And if you're feeling like I am done, I am out of here, that's sort of what she's relating there. For some of us, maybe the answer is, no, I haven't had enough. I still like some of this. stuff that I'm doing. So that's sort of thinking about work and its role in your life or the lack of role you wanted to play in your life, whatever the case might be. And then the will you have enough relates to the financial piece that we so often talk about looking at your investment portfolio, looking at whether it's in a position to sustain you over whatever your retirement time horizon might be. And then the will you have enough pertains to quality of life considerations,

will your post-life work be enough to replace whatever life you had while you were working? So there you're thinking about relationships, purpose, all those things that may have animated your days while you were working. You want to make sure that you have some of those things in your later years post-retirement. Right. Because so often people are, like, oh man, when I retire, I just, I'd like to read books and sleep. And you're like, great, that'll occupy you for a week. Then what? Exactly. Yeah. There's this bucket list of relaxation. And it gets back to what we were talking about earlier, Paula, where people just burn themselves out. They work too hard. They don't have time to really think about anything besides just getting

through the day or the week. And so they come into retirement with this bucket list of relaxation, which you absolutely should think about all the things that you want to do to take advantage of your newfound free time. But it is helpful to think about those other things, the things that will give you purpose. Jordan Grummet in the book talks about what he calls Big P purpose and Small P purpose. So Big P purpose is the really aspirational things that you might want to achieve. So maybe writing a book or doing. your whole family trees genealogy or climbing a mountain or whatever the case, hitting all of the continents, whatever. That might be one sort of big P purpose or starting a foundation.

And then he said that we all have these small P purposes that are equally important. So it might be just being a great partner to my spouse or pursuing baseball because I haven't had time to really watch baseball in the way that I did when I was a kid or being into birds or whatever. Many of us have these small pea purposes. And Jordan's point is that those are just as important as those big P purposes that sometimes give people purpose anxiety. Just go with those small P purposes and you'll be good and maybe inspiration will strike for the big P purpose.

So I love that concept of thinking about both sets of purposes as people embark on retirement. I've never heard the phrase purpose anxiety, but it immediately resonates. Yeah. Totally. When you're told you're supposed to have a purpose, it's like, oh, she, can I have lunch? Exactly. It's kind of like when people say follow your passion. Right.

Well, that's a little overwhelming. Yes. How do you even know what that is versus, oh, just follow your curiosity. Okay. That's doable. Exactly. Jordan said try to plug into some of the things that as a kid you were really engaged with. and that you just kind of let go by the wayside,

that maybe that's a starting point for some of these things. If you're feeling a little bit stymied about what your purpose might be, start there is his point. Yeah. I want to go back, actually, to something that we talked about towards the beginning of this interview, because you were talking about phased retirement and how in some workplaces that might look like

reducing the number of hours spent at your job from, let's say, 40 down to 30, and then from 30 down to 20, et cetera. But an alternate version of that would not phase based on hours, but rather phase based on tasks such that the tasks that you eliminate are the ones you don't want to do, and the tasks that you keep are the ones that you like the most. And, of course, this is very highly dependent on what industry you're in, what job you have, whether you're self-employed or you work for an employer, et cetera, like this is going to be highly individual. I'm connecting that to Big P purpose, right? Because it strikes me that some of the,

in a phase retirement, some of the tasks that you hold on to could be part of that retirement purpose. Absolutely. And I love that idea for thinking about your retirement. And of course, it necessitates that you're in good, if you want to stick with the same employer, that you're in good standing with them to be able, to call the shots on sort of the complexion of the work that you do. I do think there's an increasing awareness of older workers being really good workers that employers want to hang on to. So that's definitely something that older workers have going for them. One thing that I think is a real world issue in all of this is that invariably we get good at things that we don't love. And sometimes those are the things that our employers are like, what?

You can't stop doing that. You're the only one who does, blah, blah, blah. So that's something that people I have found have to contend with, that that thing that is on their calendar where they're like, no, those are often the things that our employers want us to keep doing because we've gotten good at them even though we don't love them. So that's maybe a real world impediment to putting some of this into action. But in general, I love that idea of trying to carry the kernels of the things that you really do love further into the future, keep doing them longer. And maybe you're stepping away from that workplace. Maybe you're just doing them in some other context. I have a close friend who is retired executive and has frankly kind of struggled with retirement.

I think she needs to do leadership in some other capacity, even though she is not in her workplace anymore, I would love to see her take on a leadership role, maybe at some non-for-profit or something like that. She's a born leader. She should continue to lead people. So I think people need to think about the things they're good at and that they like and try to carry them forward and do them longer. You mentioned that for employees, often you get good at. the thing that you don't like and then your employer wants you to do that, it strikes me that even if you're self-employed, that can still happen because your clients start recognizing you as being good at X. And so the repeat client business that you get might be for this particular

thing that you're good at, but it's not the thing that you want to be known for. Exactly. Or some specialized area of expertise where you're like, yeah, I know all that. but that is not the thing that really lights me up. Maybe know more about that than anyone else in this organization, but at the end of the day, it's not the thing I love. Right. Whether you're conventionally employed or self-employed, I could see that being a problem on both fronts.

Because essentially, that is letting the market brand you rather than you taking charge of your own branding. And sometimes taking charge of your own branding means swimming upstream. And that can take a lot of effort. It can take years. To do those pivot. Yeah. Absolutely.

But I think you're spot on that it applies whether you are self-employed, forging your own work identity or you're employed by someone else. If you were to do a phased retirement, one sticking point that I could see a lot of people grappling with is, do I physically have to come into the office every day? or do I have the latitude to work remotely and perhaps that means live elsewhere? Because it seems like a lot of people associate retirement with moving. Absolutely. And I love the chapter in the book that looks into housing.

Frankly, I think it's such an under-discussed aspect of retirement planning. The issue about whether you need to be in the workplace, it feels like this is kind of a moving target that we're hearing different things about different workplaces. Many, I think, are still on sort of the two or three days in the office, two or three days at home. Hybrid. Hybrid, exactly. But I would say that if you want to continue working, but going into the office is a big sticking point

for you, explore that with your employer, explore the possibility of living somewhere else and potentially continuing to do that job longer. People should definitely give due consideration to where they live, the type of housing that they have later in life, and also the role that home equity could potentially play in terms of the retirement plan. It doesn't make a lot of sense that a lot of older adults die with a lot of housing wealth. It's an asset that arguably many, many retiree households have unethicaled.

underutilized. And of course, reverse mortgages are not perfect by any stretch. But I think they're the right answer in some situations. And I think they should be part of the retirement planning discussion, especially for households where the finances are tighter. One of the myths that you bust is the idea that most retirees move. Some do. But many retirees decide that they're going to stay in place and they're going to maintain the same home that they've had. There are also retirees that will move somewhere for a while, but what you think you want when you're 60 or 65, when your kids are living wherever, is not the same thing that you want when you're 70 or 75 and those kids are living somewhere else and maybe they've got grandkids now and, right? Like your wants when it

comes to housing and when it comes to where you live are going to change quite drastically. I mean, over any 20 to 30 year time span, that's going to be true. Absolutely. I think demographers would say, actually, if you want to know where older adults will live, find out where the adult daughter lives, the oldest daughter. The data very much point to that being the main city where those older adults will tend to end up. It might be a moving target. And I loved Mark Miller's point in the book about how I was like, can't I just stay in my house? which is what a lot of people want. That's their community. That's their social network. And his point

was that that might not be the most practical place for you to live as you age. So don't fall into the trap of thinking yourself today is how it will be going forward, that you may have things that will keep you from it. It's not something we want to ponder, but like you may not be able to run up the stairs like you used to. And try to get ahead of some of those changes that will, inevitably accompany aging and make those decisions proactively versus leaving your kids in the situation of having to make those decisions on your behalf. And maybe they're kind of making decisions that you don't really want at that point in time. If you can kind of try to get ahead of the decision making, that's good for your kids and for your family. But it also means

that you're more likely to land in a living situation that is satisfactory for you. Right. Right, because mobility decreases as we age. Definitely. But most of us don't live in single-story homes that have no steps at the entrance and that have doorways that are wide enough for a wheelchair. Exactly. And the fact is most of us don't want to ponder that sort of infirmity, right? Especially when we're young retirees. It's not something you want to think about, but certainly most homes are not at all set up for aging. Right. One thing that surprised me is that people who, who live in single family homes, the data shows tend to be happier up until the age of around what was at 70, 75. And then after that, people who live in apartments tend to be happier because of the increased social interaction. Social interaction is so important. Michael Finca made that point in his discussion with me. And it is something that really helps our brains to make sure that we're interacting with other people. I mean, just think about this conversation that we're having, we're looking at each other, where I'm putting into my memory, the things that you're

saying and thinking about how I want to respond to them. There's so much about that that is good for us emotionally, but it's also good for our brains. And being in that community setting is so valuable. An example I gave from Michael in the book was that I was at this lunch. One of my friends' dads had died and I'm sitting next to these people talking to them and they had been all over the world. They were beautiful. They were older adults. I was like, your aunt and uncle are so amazing. And she said, do you know what? They're both in their 90s. And I was like, no way. Those people were 72. And they had told my husband and me that they had proactively moved into this independent living facility when they were still quite young when they were in their 70s, but they

liked the community, but mainly they wanted to shut their door and travel and not worry. about having a whole house to worry about and they didn't want to burden their kids with that stuff. And so it was just a beautiful illustration of how staying active had worked for this couple and it had been made possible by this choice that they had made in terms of their living situation. Not saying that's right for everyone. I'm not sure that that is something I would proactively choose, but it definitely, at least anecdotally, seems to work for people. Right.

And it makes sense that particularly as you age, relationships become, I mean, they're always meaningful, but I think you have an increased awareness of that as you age. And so being surrounded by people with whom you're close. Exactly. Yeah. There have been so many studies that have looked at the connection between human happiness and satisfaction and relationships. And it all comes down to relationships. And this is throughout our lives, including into our later years. Laura Carstinson of Stanford made the point in the book that our social networks naturally winnow down a little bit as we age. And some of that is for sad reasons that people might move away or get sick and die. But some of it is actually self-selected, that our social networks actually get a little bit smaller as we age. Because we are opting out of some of these relationships that were sort of like good enough.

And the example she gives is like your kids, friends, parents. Maybe they were great people to hang out with after the soccer games or while your kids were in high school or whatever. But at some point, maybe they're not your best friends. Maybe they are your best friends. I don't know. But she said she calls them peripheral others that you have this very large social network moving through your 40s and 50s. But then you begin to shed some of those people because you want to spend more. time with those people where when you leave that engagement, you're just kind of walking on air

because you feel like so well understood, you feel like you understand that friend so thoroughly, you know each other's families, you're asking questions about one another's siblings, just that deep understanding of each other, that's the thing that we are self-selecting into more of. And I think that's beautiful. The point is to diversify that social network, though, as we age, that we will lose some people. So make sure that we're out there meeting people, new people, and keeping that social network growing a little bit, even as perhaps we're casting people off.

Right. Yeah. And so that trope of the lonely older person is fortunately, often not true because it's just more discerning older person. Exactly. But I do think there are lonely older people. Yeah. So you want to make sure they.

you're not one of them. When you embark on retirement, your plan is to catch up on all the Netflix shows you've missed. Get something else because the data do suggest that being at home, watching TV, which is how a lot of older adults spend time, does not add to happiness. That if you could put yourself in a situation where you can build your social networks, get out with people, whether it's playing pickleball or having lunch or breakfast or whatever it is, just putting those habits into place where you're getting into contact with other people is just so, so valuable as we age. Right.

The data is not, it's obviously quite nascent when it comes to virtual relationships. What do we know or what do we have yet to learn when it comes to the value of virtual relationships in that context? Yeah, I asked Laura Carstinson about this. I was curious a little bit of me search here because my two best friends are in California. I'm a Chicagoan. So we text all day long, me and these two women, and about everything. But we do make a point of seeing each other at least once, maybe twice a year.

And that's her point, is that there's still a lot we don't know about virtual relationships either. People we might know in online communities or people who we did know in person at one point, but who were mainly text friends with at this point. she thinks it is important to have those face-to-face engagements or at least a phone call, like a quarterly or monthly phone call, she believes is enough to keep that relationship alive. If it's just strictly virtual, inevitably you'll lose something. So I'm a big believer in this face-to-face engagement. If you can't, if you're really close friends, just make that commitment to getting together.

You come here once a year or I go there. however you choose to do it, I think that redounds to the benefit of that friendship. There's just something about being with another human being sharing a meal or whatever the case might be that is just so much more valuable than those texts or sort of virtual relationships that we have. Right. Well, thank you for spending this time with us. Where can people find you if they'd like to learn more? Thank you so much, Paul. It's been my honor. Well, people can find the book anywhere they buy books. It's called How to Retire, which I think is a clear title. I'm on Morningstar.com all the time where I do videos and write articles. I've got a bunch of

model portfolios for retirement and pre-retirement, and they're free. They're part of our free site. They're just there for educational purposes. And then I do a podcast of my own with a couple of my colleagues. It's called The Longview. And so that is on any podcast platform that someone might use. And it's an excellent one. You've been on it. You were one of our favorite guests. So much, Paula. Oh, thank you. Thank you, Christine. What are three key takeaways that we got from this conversation? Key takeaway number one. Retirement spending is dynamic, not static. The traditional 4% withdrawal rule oversimplifies retirement planning. The reality is spending patterns change significantly throughout your life and throughout retirement. In your early retirement years, you're likely going to have higher discreeturement.

spending on travel. Whereas in the later years, you might have added health care costs. Planning should account for these varying phases and include separate pots of money for different purposes. With his clients, I think he gives them like a travel pot. His advice is, I hope you deplete this within the next 10 years if they're retiring at 65 or something like that. Because the data would suggest that we do tend to see a decline in spending as people, move through retirement, it averages out to be roughly a percentage point less than the inflation rate. We see this decline, and David Blanchett's research points to this decline, kind of continuing through the early 80s period, and then we see spending, in many cases ticking up in the very

latest years of retirement, and that's often the uninsured health care expenses, especially long-term care expenses. That is key takeaway number one. Key takeaway number two, use a cash or bond buffer to protect against downturns. One of your biggest risks in retirement is called Sequence of Returns Risk. And in order to protect against that, you'll need to maintain between five to eight years worth of planned withdrawals in cash and high-quality bonds. This provides a safety net during market downturns, and it prevents you from having to sell stocks when they're down. Some combination of cash and high-quality bonds, I think, would be the main things.

And my thought is, for most people, something like five to eight years worth of portfolio withdrawals and investments like that can sustain you through many types of even big, bad equity market downturns. You'll get through okay if you have roughly that much set aside in cash and bonds. Finally, Q takeaway number three. Consider a phased retirement instead of a hard stop. Rather than viewing retirement as binary, meaning you're either working full-time or you're working zero. You know, it's either 40 hours or zero hours, right? A very binary, black or white, zero or one type of a thing. Rather than doing that, consider a gradual transition.

Christine refers to this as a phased retirement. The issue with phased retirement is sometimes people interpret it. too literally that they think it's like, okay, now I go from 40 hours to 30 hours or 20. And maybe that's what you do or maybe it's just that you have some aspects of your job that you really liked, but you do not wish to continue on with that employer. But maybe you just want to carry forward those one or two or three things that you really love doing in your job in some other fashion. Maybe it's something that's completely different from your day job. But the idea is that in those years leading up to retirement, you just start taking some mental notes of like,

that was a great day. Those are three key takeaways from this conversation with Christine Benz. Thank you so much for being part of the Afford Anything community. If you enjoy today's episode, please do three things. First and foremost, subscribe to our newsletter, affordathing.com slash newsletter. We also have a free ebook. It's called Escape. You can download that at afford anything.com slash escape. It's all about how to escape the 9 to 5 grind.

Again, that's afford anything.com slash escape. Second, share this episode with your friends, your family, your coworkers. Share this with the people in your life. Spread the message of having strong financial health and reaching financial independence. And third, please leave us a review in your favorite podcast. playing app, whether that's Apple Podcasts, Spotify, or any other app that you enjoy. And of course, make sure you're following this show on every podcast playing app that you use. And come find us on YouTube. We're there at YouTube.com slash afford anything. Thank you again for being an afforder.

This is the Afford Anything podcast. My name is Paula Pant and I'll meet you in the next episode.