Ep #52: How Much Do You Want to Spend in Retirement?

Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan

Micah Shilanski:  Welcome back to the Plan Your Federal Retirement Podcast. I’m your host, Micah Shilanski, and unfortunately, not with me is not Tammy Flanagan. I’m flying solo this week. Tammy’s off doing some great content, some great webinar content and other things, but I still wanted to get together with you guys for an amazing podcast. Now, I want to talk about something in this podcast today that’s not necessarily a direct question that I get, but it’s an indirect question, right?

                           I love answering your guys’ direct question. If you haven’t jumped on our website, planyourfederalretirement.com and submit your questions and whatnot. I would love to hear those. Those really help us with creating new content. This helps us guide new things. Answer your questions directly is something that we absolutely love to do. Make sure you get us those questions. Make sure you make those comments in there. That’s super helpful for us.

                           But one question whenever I’m meeting with clients… Because keep in mind, my job is that of financial planner, right? We look at it with a federal benefit lens, but I’m focused on the financial planning side of how do we understand your benefits? How do we apply them? How do we get the maximum out of them? But how do we make sure you have an income that you can never outlive in retirement? How do you achieve those retirement dreams? That’s really what our focus is on.

                           When we’re looking at these things, one of the questions that always comes up is… One of the questions that I always ask and you hear Tammy and I joke about this in the past is a bit about not really a trick question, right? But there’s an easier answer to it than sometimes we give, but how much do you want to spend in retirement? This can be a hard question and a simple question, right? The hard question is when we think about it says, “Oh my gosh, well, what do I want to spend in retirement? What is my life going to be like? How much do I want to have? What do I want to do,” et cetera.

                           Well, the simplistic answer and generally the 99% accurate answer is 100% of what you’re spending today. Now, I know there are some things out there that says you only need 80% of your income in retirement, or if you don’t have a mortgage, you need 60% of your income in retirement. Those are looking at things through a different lens.

                           Here’s the lens I’m going to look at it with is actually working with federal employees and doing this for almost 20 plus years now. I’m telling you that what you’re spending pre-retirement, 99% of my clients is what they want to spend after retirement. Very few need less. Some need a little bit more, right? We really got to be looking at seeing, okay, great, what are we spending? This is not a cash flow question. The B word can get us into a lot of trouble, right? That’s budget, right? Come on. This is a PG audience we’re going for here. It’s the budget word that gets us into a lot of trouble, especially if you’re married, right? One, none of us like budgets to begin with. Two, now it almost pits your spouses against each other inside of that budget world. Who’s spending what? How is it set up? Et cetera. Another thing that I don’t like about budgets is budgets also is justification of everything that I’ve spent in the last 12 months, at least this is how I do it, right?

                           If I have to do a budget and show somebody what I spent in the last 12 months, immediately what I’m going to do is go and justify it. Why? Because I made the decision to spend the money then. Clearly I thought it was a great idea, whether it was or wasn’t. It’s a different decision now, but then I thought it was a good idea. Cause I chose to spend the money. I don’t like budgets because we just justify our expenses. Instead, I love cash flow planning. Now you could look at this and say, Micah, it’s the same thing. I view it as a little different. So I’ll let your decision lie depending on which way you think it is. So I like cash flow planning because it’s huge in retirement.

                           So what is cash flow planning? Well, it’s a couple of different things. One, it’s going back to that question, “How much do I need to spend into retirement?” Okay. It’s probably the same thing you’re spending now. All right. So maybe that’s the answer. The second question I always ask to clients is going to be, “Great, where are you spending your money today?” Not you know, to the 72 different line items in some Quicken or Mentor why now budget that you have and if you have those and you love those great, I’m not picking on them right? But for most people, those don’t work out too well in my experience because we’re just justifying our expenses. So I don’t need to know down to the penny where you’re spending money, but broadly, what are the top three? What are the top four categories of expenses that you have?

                           Why is this important? Because we measure what matters and when we get close to retirement and in the first year to two years of retirement, this is critical time that we’re setting behaviors, we’re setting patterns and we need to make sure you are set up for success. So I really want to be cognizant of our cash flow. If we get into a bad habit into retirement, let’s say we go to retirement and we want to spend, you know, $8,000 a month, which is great. But then all of a sudden we’re spending $10,000 a month in retirement. Cause we’re not paying attention. That’s very easy to happen. And maybe you do that for 18 or 24 months. Now you’ve established a habit that can be really challenging to get out of. So how is that going to work throughout the long term? Right. So cash flow management is really, really important.

                           Here’s the way that I like to look at it with a lot of clients. All right. How much money do we want to spend a month? Okay. Let’s say it’s $8,000 a month, because that’s what we’re spending now. Okay, perfect. Where’s that going to come from, is going to be one question. How are we going to fill the gap? But also where are we spending that money today? In my world, I like to break cash flow down into four categories, five at the absolute most, my ideal is four and that’s it. It’s generally household entertainment travel then depending on your age, medical or kids, right? It’s kind of those top four categories and most things are going to fit into those. Right? We’ll talk about some exceptions in just a minute. Now what I like about cash flow management is with people is, when we don’t know where we’re spending our money, we don’t know how much we’re spending in these.

                           If all of a sudden, if we use one credit card, because that’s where most of us are, right. We use one credit card. We put all of our expenses on one credit card. At the end of the month, do we really know how much we’ve spent? Okay. We could look at the balance. Right? But the problem is if I’m over budget, or I’ve spent too much money, what am I going to do? I’m going to justify it. Oh it was because of that plane ticket. Oh it was because of this. Oh, it was because of that one time expense seems to happen every month, don’t they? Those one time expenses, right? But it, that one time expense, that’s why I’m over in this category. So what I love to do is let’s break that down and isolate it a little bit more and to see really where we’re spending at and what happens is when we do that, which is like shining a flashlight on it, right? And now all of a sudden, when we have awareness about something, we make better decisions. It’s kind of funny how that works.

                           So good example, let’s say the household, I like to, for my four different categories, believe it or not, I like to have four different credit cards that this is set up on. So it sounds a little crazy. And those of you that are super interested in points and maximizing out and spinning areas in different ways, et cetera, this may not be a good solution for you. Because I don’t want us to maximize out points, I want you to maximize your cash flow because I’m solving for something different. So when this cash flow side, what all I like to see is you get one credit card for household expenses. Household expenses, all of our reoccurring stuff. It’s our groceries, right? It’s our utilities. Yeah. There’s going to be a mortgage payment. Maybe some utilities won’t run on credit card. That’ll automatically come out of your checking account, sure. But we have one credit card that’s for household expenses, right? That’s the routine stuff.

                           Then we have an entertainment credit card. What’s on entertainment? Anything you don’t have to have. What’s a good example of this? Going out to eat. That’s not a household expense. That is an entertainment expense. Right? You could just eat at home so, or DoorDash or any other delivery. That’s an entertainment expense. Buying groceries, I’m okay saying that’s a household expense, right? We got to draw a line somewhere. So that’s where we draw this line at.

                           Then we have one for travel and generally this other, these other two credit cards, right? Household, entertainment, pretty much everyone has the other two cash flow expenses are, where do you spend most of your money? A lot of times it’s travel, especially coming to retirement. Great. I love to have a separate travel credit card. Now why do I like this? Because a lot of my clients want to keep doing travel into retirement. Great. How much do you spend on travel? We don’t really know. Well, all of a sudden, if I have a separate credit card and I’m putting all of my travel on one credit card, guess what? I have a really good idea on how much I’m spending on travel. What’s the other part about this? Well, if my household credit card is more than what it’s supposed to be, I can’t blame it on an airline ticket, right? Because Nope, that goes on the travel card. Now we can start isolating really where we’re spending in broad categories.

                           Then the last one I like is generally medical or kids, depending on the age that’s there. If the kids are out of the house, generally medical starts creeping up a little bit more. If kids are in the house, then maybe it’s a kid’s credit card and we can see how much we spend on kids. Maybe you don’t want to know. It is expensive. They’re worth it, right? But they’re still expensive. But it’s nice to know where those funds are going.

                           Couple things that I really like about this. It puts spouses on the same page in finance. What do I mean by that? Well, if you’ve ever, mistake that I have made multiple times, unfortunately, because I can’t learn just once, is, you know, try to work with my wife on a budget and she views it as me telling her what she can and can’t spend. Which isn’t what I’m trying to do, right? I’m just trying to say, how much are we spending? But because of the marital dynamic, she feels I’m trying to restrict her spending. So it’s okay. How do we walk around that? It’s kind of like walking through a minefield. So one of the ways that I love to do it is we don’t talk about budgeting, we say cash flow.

                           Great. As long as the household credit card is between X and Y. We’re good. If it’s over Y, we simply bring it up as saying, “Hey, household credit card for our family should be about $2,500 a month, give or take. All of a sudden it’s $3,200.” Okay. It’s $3,200. Now quick conversation, the first of the month, we look at that, the credit card’s over. When you say, “Hey, it’s over, we’re both aware of it.” Then it’s amazing next month, now we are making better decisions. Now that credit card is back down in line.

                           We don’t have to have this long conversation. I don’t have to go and justify the money that I spent on things. We’re bringing awareness to it. And nine times out of 10, if we’re savers and not spenders, nine times out of 10, if we bring awareness to something it’ll automatically fix itself. So this can work out really, really well.

                           The entertainment credit card, kind of the same thing. It should be in a range. You guys sit and decide it, it should be between X and Y. Why do I like a range of these things? Because I’m gear mark… I’m gearing it for success. It’s never going to be a hundred percent consistent. It can always be a little bit different. And I want room for success inside of there. If that says, “Great, entertainment can only be $783 and 26 cents.” What happens when it’s 785? Is that a success or a fail?

                           That’s a fail. It’s over budget, right? It’s over the cash flow amount. I want to give a range because that allows for a little bit more success, that’s going to be there. Again, if it’s over, it’s a quick conversation that’s, “Hey, we’re over. Let’s think about it more, a little bit this next month.” I don’t justify any expenses. I don’t go to look to see why it was over, because I don’t want that marital tension that’s there. And then nine times out of 10, it’s fixed the next month. But now we know where our money’s going. So now as I’m getting ready to retire, as I’m working with clients on this aspect and I say, great, how much a month do you spend? They can say, great. I still want this $8,000 a month because that’s what we have coming in, now. I say, great. Where does it go? Now it’s only four categories for that $8,000. We know how much household is. We know how much entertainment is. We know how much travel is. We know much medical is, right. These things are super important.

                           What’s another reason these are super important? Let’s say, I mean like right now, the market’s down right now, roughly 15% year to date. Right? Of course, it fluctuates and all that fun stuff, but you go into retirement and let’s say everything is down. Okay. And you had to cut your spending. Great. What can you cut? Now with my clients? We know what those numbers are. So we got to keep household solid. We got to keep medical solid. Right? Because those two things are kind of the must side of it. But travel and entertainment. That’s a bit of a flex budget, right? If we had to, not ideal, but I like backup plans. If we had to, we could easily cut that amount and it’s not dramatically going to affect their lifestyle. It’s not like they can’t make a mortgage payment. It’s not like they can’t have food. It’s not like they can’t have it. Maybe it’s just a 10% reduction in entertainment, which really isn’t the end of the world. But now they have a plan.

                           So my clients feel empowered with this because if something happens, they have an action plan. They know what they’re going to do in these things versus, oh crap. The market’s down 15%. I’m taking money out of my TSB. The TSB is still following. Now, what do I do? Now, they have a plan. They have an action plan that they can do, which is really, really powerful.

                           On my end, from the financial planning side, absolutely love it. Because I have this range that my clients spend money in. Then from my planning standpoint say, “Great, how do we need to be invested? What are the tax consequences? What are the survivor needs?” Right. All of these things I can be thinking about, because we have some good cash flow management, which is taking place. So cash flow is king, especially in retirement. So really understanding where that goes is really good. I like to limit it to four, no more than five cards. If you start doing more than that, it starts getting a little bit crazy. I’ve had some people try, it generally kind of blows up.

                           Couple other pro tips. One. I like to label these cards, right? So my household card, guess what? It’s called household card, right? It’s called household. It, it says it on the signature line so I can see it. I also, whenever I start this, I also move the credit cards in my wallet, because I’m used to just opening up my wallet and using that same credit card, right? And so this is something I have to fix at checkout. This isn’t something I can fix later. So when I’m going to check out, I got to use the right credit card.

                           So what’s the best way to do it? Put it in a different spot on my wallet because now I got to think about it. Now I open up my wallet, the card’s not there’s. It’s like, “Oh yep. I got to use the entertainment card. Oh yep. I got to use this.” Now you could be asking yourself, “Micah, I go into Fred Myers, I went to the grocery store, and all of a sudden, some of, and I bought some clothes and I did some other things, et cetera. And some of it’s entertainment and some of it is household. What do I do?” Great. Checkout twice. Put a little divider in there.

                           Now, if this is a $3 item, let’s throw it on the household budget and move on, right. There’s no reason to parse it to that detail. I want a good 95% here. But if you’re buying some larger things like Costco, they always have those great things that we need, right? Even though we don’t actually need them, right? So it might be a household thing, but maybe I’m buying another large ticket item because it’s summertime in Alaska and I want some more fishing stuff. Guess what? That’s on the entertainment card. That means there’s two different checkouts that I’m going to do to make sure that this one goes on the entertainment card. So I’m watching my spending. Really, really important.

                           Amazon is the same way. I got multiple cards entered into Amazon and we got a checkout. Great. These are the household things we’re going to check out and yep, these are the entertainment things. Is this more work? Absolutely. Is it as much work as reconciling your bank account for the last three years? No, not at all, right? This is pretty easy. It’s a split second decision that we’re making, only takes an extra minute or two a checkout to make sure this gets done. But now at the end of the month, we know where we spent money. We know how much it costs to live and that’s very empowering to know what these things are. So really encourage you guys to do that.

                           Another thing that I like to do, if you have rental property or if you have another small business, this would be a reason for another credit card that kind of violates my four card rule, right? Because real estate’s a little different. So if you had a rental property, there’s some other things you’re speaking about like LLCs limited liability companies, et cetera on how that should be structured. But with a lot of our clients, I like them to have a separate credit card and a separate bank account for those rental properties.

                           Why? You know what it makes tax prep so much easier. I haven’t merged all the funds together. In my personal account. I got a checking account. I can simply look at it. Great. What were all the deposits throughout the year? Perfect. That’s how much money it made in rent. What were the credit card receipts? Perfect. Now we know how much money was spent. A lot of credit card companies at the end of the year will dissect that for you by categories, to where you spent money. That can be super, super helpful in things. And because I’ve used a separate card, it makes it so much easier for the application of these things. So we got to be thinking about this. Like what’s the goal in mind? The goal of this is to know where we’re spending money and to make informed decisions about our money.

                           All right, this podcast is all about action items. So first thing I want you guys to do is ask the… Answer the first question. How much do you want to spend in retirement? If you don’t know, here’s the cheat sheet, go look at your LES, your leave and earning statement. How much do you bring home every two weeks, right? That’s how much you probably want to keep going into retirement income. The second question I want you to ask yourself, where does that money go? What are the top three or four categories that you spend money on? Now, if you don’t know, not by looking up a spreadsheet, if you don’t know, off the top of your head, this is where cashflow management might be important for you. This might be the credit card strategy that you do.

                           I have some clients by the way, that just overspend on credit cards, they just do. And so they went back to the envelope system, which works out really, really well. And so they do the same thing, but they just use cash and envelopes inside of their house because they know they’re going to overspend on credit cards. You know what? Kudos to them for recognizing that they have a little bit of a problem, a little bit of weakness there. And they’re saying, you know what? I’m not going to use that. I’m going to use that checking account. I’m going to use cash for the same concept. Great news, it still works. Right? So if we can’t use credit cards, we use checking account. You could still do that. It’s the same concept. You need to know where you’re spending money. If you don’t know, then that’s probably reason to say, “Hey, I need to change some behaviors that I have to find out where my money is going.”

                           And the number three, what I want you to do. I want you to commit to doing this for the next 90 days, right? The next 30 days it’s going to suck. I would totally agree with it. It’s different. We generally don’t like change. It’s going to be something unusual and uncomfortable. So commit to doing this for 90 days, right? All of my clients, and now you can absolutely be the exception and say, this doesn’t work for you. All of my clients that have done this consistently for 90 days, at the end of the 90 days, you’re like, “Micah, this was a great idea. This actually worked. I could see where my money’s going. I like the process of it. I like knowing this.” Because now they feel in control of their finances versus it’s loose and free into the wind. We don’t know where our money goes. That’s not a great feeling, right? Now they at least know, in broad categories, how much does it cost? What are my plans? What are my actions, et cetera.

                           And as we get into retirement, now they can say, great, when we have a down market and things go down, what are they going to do? What are their options? They’re now empowered because they have this information. This is the power of cash flow planning, and a gift that you can give to yourself. All right. So super passionate about it. I know I’m geeking out about taxes and cash flow and money, but you know, just is who I am. So a couple of other things to do. One, refer some friends to us. This podcast is growing because of you, because of the content that we provide, you guys are liking it, you’re sharing it. You’re sending out more federal employees. So thank you. Tammy and I have some very ambitious goals to get this information out. We love your comments on YouTube. We’re going to get more proactive in responding and doing those things. So please go ahead and keep posting those. And until next time, happy planning.

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