Deconstructing Retirement

Michael: Welcome to Rehab Your Finances, a podcast about personal finance for healthcare, education, and caregiving professionals. I'm your host, Mike Powers, physical therapist, full-time educator, and certified financial education instructor. Quick reminder that this show is for entertainment purposes and should not be taken as investment advice. Let's get started. In this episode, I wanted to deconstruct the retirement numbers, and I'm basing this off a recent. 2026 Northwestern Mutual Planning and Progress Survey. And in this survey, they mentioned that Americans now think the magic number to retire comfortably is $1.46 million. I wanted to use this as a launching point to look at, well, is this number true? Because I do think that for many people looking at this number, maybe it s it seems unattainable. No way I'll get there. And is this number actually accurate? So I wanted to do kind of two things in this episode. One will be giving you a roadmap on how to determine or estimate what you may actually need in retirement, and then present the data and evidence that shows what you realistically think you may need. You'll probably need much less. And that's backed up by spending habits and actual data on retirees. So on the one hand, I'll show you the numbers of how to get in the ballpark. And then show you that that estimate or those numbers may be higher than what you initially think. And this is consistent with a big premise of this show is wanting to avoid that negativity bias. Think back to episode two. I made the case for cognitive optimism. And I want to show that this tie into optimism goes beyond not overly stressing about numbers that may seem high, but this optimism also carries through into retirement. And we'll conclude this episode by talking about what actually makes a happy retirement. And spoiler alert, it goes well beyond just the numbers. But let's start with the numbers. Recalling episode four, which was titled Know Your Numbers Part One, I tiptoed around the budget. I called it the 50-30-20 method and really outlined the importance of looking at your money coming in and your money going out. So knowing your monthly expenses. And splitting that between kind of necessities, which should be about 50% of your budget, your wants, which is about 30%, and then your savings, which is about 20%. So you can go back to that to kind of get an idea of what realistically you're spending per month. And that would be your current kind of needs in terms of income needs. If you figure out what you're spending per month, you multiply that by 12 and you get your annual needs. And so that's a starting point for a projection to get you in the ballpark. Now think about though in retirement, this number is likely to change. So maybe you currently have some caregiving responsibilities, some childcare, caring for an elderly parent. Those expenses may drop off. Possibly if you have a mortgage, maybe that mortgage will still be there or not. So that may change. And then also think about when you're actually in retirement, you're not going to need to be saving for retirement. So, whatever it is that you're currently investing or saving for retirement drops off. So, again, you can take your current monthly budget, or shoot, I use the B word, sorry, but you can take your current monthly expenses, get an estimate, and then kind of project out how might this monthly estimate change in retirement? And that'll give you your estimated monthly cost. You multiply that by 12 to get your estimated annual cost as well. Couple other considerations here. So Depending on when you think you're going to retire, you may then be accessing Social Security. And we'll talk a little bit more about that. And also for many teachers, you may have access to a pension. And Social Security and pensions are going to have a big impact on decreasing the amount of lifting that your retirement portfolio needs. So again, if we go back to that Northwestern Mutual study, most Americans think we need 1.46 million to retire comfortably. And we'll see what that number means as we look upon some rules of thumb like the 4% rule or the 25x rule. However, that number does not figure in or factor in possible pension and social security. And it also doesn't factor in changes in spending habits and the fact that many people in retirement still bring in some form of income. So again, by the end of this episode, Hopefully I'll have taken away some stress and anxiety about that number because we'll see what you truly need may be much lower. I'm not advocating that you don't save and invest for retirement, but I am advocating away from the scare tactics of high numbers and thinking that I'll never get there or getting discouraged. Instead, I'm saying let's lay the groundwork, lay the foundation. Here's what I may realistically need, figure out the other things that come into it, such as pension and social security, possible separate income streams. And we'll see that the actual number is probably much lower than this 1.46 million. I want to now talk about Social Security because that's kind of the elephant in the room. Some of you may have seen that with the current projections, there is the risk of Social Security being insolvent by 2032. Now that doesn't mean Social Security won't be there. The best current projections are if insolvency hits in 2032, there's going to be a decrease in about 22% in monthly benefits. So Most projections and estimates I've seen indicate that we should assume Social Security is still going to be there. It would be political suicide in many ways for politicians to completely abolish it. And there's probably some course correction that needs to happen. However, as we're planning this out, I don't want you to go into this thinking I won't have any social security at all. We're not going to go into that kind of financial nihilism here. But realistically thinking, okay, maybe my benefits will be less. Then what I would otherwise get by about 22% is reasonable. If you log in at SSA.gov, and I'll link this in the show notes, you can look up your estimated Social Security retirement benefits. And these are based upon your tax returns, how much you've put into the system. And on that website, you'll see that there's projections for early retirement at age 62 and delayed retirement at age 70. And it's really outside the scope of this current episode to discuss decision making of when to pull the retirement. But some factors that may go into it include survivor benefits, the increased or the guaranteed increases if you delay, and there's kind of a break-even point depending on lifespan. Let's talk about a couple rules of thumb on what you'll need. First, let's start with the 25x rule. This is back of the napkin math, big picture, not real nuance, but it's a starting point. So once you've calculated out. Previously I mentioned, okay, look at your monthly expenses, knock off your savings out of there, knock off anything you won't need in retirement. Look at a legitimate estimate of what you're going to spend monthly, multiply that by 12 to get your annual needs. Then you're going to multiply that by 25. That number represents an estimate of how much you'll need in retirement. So whatever your annual expenses are, multiply that by 25. And this 25x rule is based upon another rule. There's so many rules and assumptions in personal finance, and that's based upon the often cited 4% rule. The 4% rule was initially proposed by Bill Bangin back in 1994, and he determined safe withdrawal rates using historical data. And so he looked at stock market performance throughout history and determined that a 4% withdrawal rate each year. with increases accounting for inflation would survive a 30-year retirement. So that's a key assumption, looking at a 30-year retirement in any historical economic scenario. So even if we factor in the Great Depression, if we factor in the Great Recession in 2007, 2008, the dot-com bubble, any historical period, if you were retired and withdrawing 4% every year, your portfolio Would survive over 30 years. Couple key assumptions here that we want to bring to the forefront. This 4% rule assumes a relatively balanced portfolio between stocks and bonds. And previously in the show, we've talked about stocks and bonds. So here in this 4% rule, the assumption is a relatively even 50-50 split. I think commonly you'll see retirees talking about a 60-40 split. So that is an assumption we want to keep in mind. The other key assumption is that the historical data can be projected out where it gives us an indication of what will happen in the future. And you'll often hear past performance is no guarantee of future performance. However, I think looking back at history and having these big data sets does minimize some uncertainty. I think at the end of the day, you can't eliminate all possible risks. There's always potential black swan events. However, if you think about all the data that Bill Bangin looked at, over those 30 year periods, it does account for black swan events that people didn't foresee. Even though I say he put this out in ninety-four, he's recently revised it and I'll give you the updated number. So it does include the dot com and the Great Recession, et cetera. So many of these shocks, these economic shocks, nobody necessarily predicted. But through it all, the stock market has remained resilient over time and over time has continued to go up. So that's a nice thing to see for those people maybe that are anxious or nervous about investing. Bill Bangin recently revised this based on updated data to the 4.7% rule, doesn't roll off the tongue as smoothly, but he seems to indicate that, you know, maybe you can go a little bit higher up to 4.7% withdrawal rate. And along with this, his his key consideration is that inflation is the biggest risk to retirees. So that goes back to something previously mentioned on the show is that inflation risk is so high that we really need to stay ahead of inflation if we want to maintain our purchasing power. And that's why we do need to invest. We can't just put our money in the mattress or in savings because we're not going to retain that purchasing power. So again, to sum up. 4% rule, rule of thumb, doesn't apply across the board. There's not always a ton of nuance, but it's a starting point. So for instance, if you had a, let's say, a $1 million portfolio using the 4% rule, you could argue that you can safely withdraw $40,000 a year and that would get you through 30 years of retirement safely through any historical scenario. What the data will show though is that in most cases, most retirees, their portfolios actually grow over time because of their returns in the stock market. So this is really trying to provide some risk reduction around worst case scenarios, hopefully having you feel fairly comfortable about what your withdrawal rate could be and having a sense of, okay, what am I trying to hit? Going back to what we talked last episode, then using that compound interest calculator. Let's say you have a certain amount of investments now. Let's say you're 20 years from retirement and you're thinking, okay, here I figured out what my expenses are. So I need 25 times that. You could go into the compound interest calculator and figure out where your portfolio might land by the time you get to retirement. And again, you we're making a lot of assumptions here. You have to put in what you think your annual rate of return is. You have to put in certain assumptions and Hopefully by now you're getting an understanding that a lot of these projections in personal finance are based on assumptions. So we're never going to be perfect. But what I would argue is we're going to have less uncertainty doing it this way than if we just threw our hands up and said the world's a scary place. I don't know what's going to happen. So I'm not even going to try. So I think we accept that we're getting in the ballpark by using these estimates and these projections, but we're understanding that we're not going to be 100% perfect. Some of the risks then we need to think about in retirement, as previously mentioned, is going to be inflation. That's a huge one. And until recently, inflation was probably an afterthought because not too much was going on there. But then we had COVID. And in more recent times as well, we've noticed inflation really ticking up and being more of a concern. So figuring out inflation is going to be important and staying ahead of inflation is key. You may have also heard the term sequence of returns risk put simply. This means that if you retire and there's a period, a prolonged period when the stock market is down, that's going to impact your retirement because your principal, that main balance that you're trying to get returns on, has gone down so much. The value of your individual stock share, your ETF share has gone down. If you have to sell it this time, you've locked in those losses and it can take a long time to recover from. And it's outside the scope of this episode to talk about, but this is why. You may have a certain amount in cash reserves, maybe T bills, maybe bonds. So you've got a little bit of a hedge against a market downturn to try and guard against this sequence of returns risk. And this sequence sequence of returns risk is really just bad luck. There's not much you can do about this if you choose to retire at a certain point and the market goes through a prolonged downturn. That's just part of the risk that's involved in choosing when you retire. Other thing to think about is going to be healthcare and medical. I have not really built in a lot of the healthcare discussion into this episode because I'm assuming we're going to go through a case study where retirement age is 65. So someone will be on Medicare, but that's something to keep in mind as well about possible needs or changes with healthcare or medical costs. And it's really, I think, a key consideration for when you're thinking about retirement. Don't just think about the numbers as they relate to money. Think about your health numbers as well. Because if you're working so hard, saving, but you're not healthy, you get to retirement. And now maybe you have an okay lifespan, but maybe your health span has declined. So you're not healthy enough to enjoy the money you've saved. So I see a lot of similarities between the behaviors saving for retirement. From a money perspective, but also saving for retirement from a health perspective as well. So don't sleep on the importance of taking care of your health. Let's do a little case study. And I hope you like numbers. For those of you that don't, maybe blast past this section. But I think putting a few numbers in here may be a helpful illustration on how to look at what someone may need in retirement. I'm taking someone who is a single person. Keep in mind that if you're married or have a partner, you're splitting a lot of expenses. So your actual number in retirement may actually be quite a bit lower. So we've got Hector, who's planning to retire at age 65, and he's gone through his numbers and he's estimating that he's gonna have about $7,000 a month of expenses in retirement, or about $84,000 a year. He's a teacher, so he's gonna retire with a pension, and his pension's going to provide. $4,000 a month or $48,000 per year. When he went on to SSA.gov and looked at his Social Security benefits, he's estimating that he's going to be receiving from Social Security $2,000 a month. And that's around the median or average Social Security benefit. So that's pretty realistic. So he's getting $2,000 a month from Social Security or about $24,000 a year. If we combine all of these, So let me recap. He's got $7,000 a month in expenses. He's going to get $4,000 a month in a pension. So now he needs to cover $3,000 a month in expenses. He's going to get $2,000 a month in Social Security. So now he needs to cover $1,000 a month in expenses or $12,000 a year. So using the 25X rule, he's looking about wanting $300,000 in retirement savings. From this case study, you see that his pension and social security is doing most of the heavy lifting. And his retirement portfolio, his retirement savings, is really just picking up the slack. So in Hector's case, he's looking at needing $300,000 in retirement savings, which is much lower than the $1.46 million cited initially in that study I mentioned. Now again, he's Fortunate he's got a pension. If he didn't have that pension, then obviously his retirement portfolio would need to be substantially bigger if he wanted to stay in line with the 25x rule and the 4% rule. But I'm also going to point out a couple of things of even without the pension, why the 25x rule may still be overestimating what you need in retirement. Because you may find that in retirement, some of your expenses naturally go down. Maybe some debt that you had previously has gone down. Many people in retirement do continue to work maybe part-time. They have additional revenue streams. Many people do not just retire and don't do anything at all. I'm not advocating that your retirement plan should be that you have to work till age 80. I'm telling you that the data indicates that many people continue to bring in income after retirement. So relying purely on a retirement portfolio to meet everything is not what happens in actual life. The other thing I want to point out that many of the financial habits that hopefully you're employing now, in terms of knowing money coming in, going out, making sure you're spending money aligned with your values, many of these habits will carry over into retirement. So if you've been diligent about your expenses, where your money's going, that is an additional benefit as you move over into retirement. In terms of what retirement looks like realistically, Retirement withdrawals are not linear. So the 4% rule is essentially saying, okay, every year you're drawing 4% down from your retirement portfolio, adjusted for inflation. So every year it's the same. And I'm just gonna make up a number here. So 50,000, 50,000, 50,000 with that 3% adjustment for inflation. That's not what actually happens though in retirement spending. And you could even think back to your own life, look at your last five years. Has your spending been consistent or has it been variable? Things happen. Maybe you have a child, they're in daycare, they come out of daycare, you had a car that had some issues, you need a new car, or you went from a high cost of living to a low cost of living area. So many things are variable. And the same is true in retirement, and that's backed up in the data. The other thing that's talked about a lot in retirement is what's called the retirement spending smile. So you essentially have what some people call the go-go years, slow-go years, and no-go years. And this is theoretical, but it's borne out in how many retirees spend money. In the go-go years, you've retired, maybe you're traveling, home modifications or home renovations, your spending may be higher at the beginning of retirement. Then slow go years, maybe you've traveled place you want to go, you're slowing down a little bit, not spending as much. Then in the no-go years, maybe the health is a little bit worse, you have more healthcare spending, so spending goes up. So that's kind of the retirement smile. And the empirical evidence is that retirees ultimately spend much less than anticipated. You will likely need less than these projected numbers. And I'm bringing this up not to say, okay, don't save, don't invest. I'm bringing this up because a lot of the numbers that are put out there of what you'll need, keep in mind negativity bias, keep in mind that the job of a lot of incoming information is to scare you, to keep you engaged. And the data actually shows that you're going to need much less than anticipated. So set your, I would recommend set your goals based off the 25x rule, while keeping in mind that for most retirees, their portfolios actually go. Up in retirement and they actually end up spending or needing less than they initially thought. Those were the numbers, but I want to conclude here by talking about kind of a the holistic approach and talking about happiness in retirement. Because what if we've saved all this money? We've delayed gratification. We get to retirement. We don't know what to do with ourselves or our health is poor. And I don't think that's the purpose of what we're trying to achieve here. In Rehab Your Finances, we're about knowing our numbers and using the evidence, but we're also about being very intentional and holistic and living a life with purpose and a life that's aligned with your values. So I want to conclude here talking about data and some evidence on happiness in retirement. I'm going to cite a Forbes study. And then cite some information from the book, What the Happiest Retirees Know. And this is just a little food for thought to keep in mind. So we're not just putting our heads down, nose to the grindstone, got to hit a certain number. Think about the life you want in retirement. And I would advocate think about can you put those building blocks in place now as well? So according to Forbes, the happiest retirees have an average of 3.6 core pursuits. That's activities you're passionate about. Whereas the unhappiest retirees have 1.9 core pursuits. So having things that engage you that you feel passionate about is going to contribute tremendously to happiness in retirement. Hopefully you're not itching or aching to get to retirement quickly just because you hate your job. Hopefully you have things that you really want to do, and that's going to lead to more happiness. Those that have children, if they live near but not with, which I found an interesting caveat, 50% of their grown children are going to be happier. So that Family social connection. Another key factor is being married. You're 4.5 times less likely to be happy or 4.5 times more likely to be unhappy if not married. And I'm not advocating that everyone needs to be married. I'm sharing what the data says. And again, I think this points to social connection and it makes sense because if we think about work, we get a lot of social connection from work. So having someone that we care about and that ties in with the kids as well, living possibly near the kids. Having a reason, having some purpose is important. Along those lines, again, having at least three close connections. And a close connection is someone who celebrates good days with you and someone who can comfort you on the bad ones. So that importance of the three close connections. And I'd advocate those building blocks now. You may have heard some discussion about loneliness epidemics or people are more isolated. So even fostering those connections now before retirement, I think will go a long way. And then finally, If you regularly attend a place of worship, you're 1.5 times more likely to be happy. The book, What the Happiest Retirees Know, has 10 kind of habits or things associated with happiness in retirement. And I've split them out into financial and social. The author here describes five financial habits or considerations and five social ones. Financial is steady and diverse income. Encourage financially independent adult children, paying off your mortgage if you have one, having a long-term investing approach, and being smart about your spending, not approaching it with deprivation, but being smart. I would argue that a lot of those are habits that we're encouraging now as you move towards retirement. And those all make a lot of sense to me. On the social side, the five key habits or the five key considerations for happiness in retirement are to prioritize health. Planned social interactions, prioritizing love, so either marriage or long-term partnerships, prioritizing faith, participation and faith community or church attendance, and curiosity, committing to lifelong learning and engaging in new interests and hobbies. Now, why did I talk so much about happiness in retirement? Started off by talking about the numbers and what numbers Americans think they need to hit. And I would argue that the numbers are only part of the story. This show is about intentionality and values, and happiness belongs in the conversation. I want you to have the confidence to determine your realistic retirement numbers, but in my opinion, retirement extends beyond a number. And I'd encourage you to think: what is your life like now? What lights you up? What are you doing that makes you happy? What are you trying to achieve? And then build a bridge in your mind. How would you like your life to be in retirement? So going away from the thought of kind of the binary thinking of, ⁓ I'm just going to save and I'm going to deprive myself. And once I get to retirement, I'll have the money I need. Or once this happens, then I'll be happy. Start thinking about building your life now, building the systems and habits that secure your finances, that rehab your finances now, and think about how you build that bridge to retirement. And recognize that a successful retirement is only partially about the numbers. It's about your life as seen holistically and as seen with purpose. So to close out and then look ahead to next episode, the numbers needed for retirement, I put needed in air quotes, may or may not apply to you. Hopefully you now have an understanding using the 25X rule, the 4% rule, how you can get some back of the napkin ideas. of the numbers you need, but those numbers may not tell the full picture. And again, the data shows that most retirees actually end up spending less than initially projected, and most will have additional sources of income in retirement. In line with this show being all about intentionality, I'd like you to not blindly accept headline numbers, run your numbers, see what you'll likely need, and see how that fits within your life and your values. And speaking of life and values, Next episode, we're going to talk about money psychology and money scripts, because while knowing your numbers is important, actually then engaging in positive change and doing something about these numbers is a psychological process, and you most likely have some self-limiting thoughts and stories that may be getting in the way of you living the life that you want to fully enjoy. Thanks again for trusting me with your time and attention. I look forward to connecting with you in the next episode. Until then, I encourage you to really think about the life you're living now, the life you want to live in retirement, and how you're going to go about building that bridge.