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

On This Episode

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

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Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

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

 


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

 


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

 


Nick: Oh, it’s hot here.

 


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

 


Nick: Doing pretty good.

 


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

 


Nick: It’s definitely hot, yeah.

 


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

 


Nick: Well, I’ll trade.

 


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

 


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

 


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

 


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

 


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

 


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

 


Marc: That’s hefty.

 


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

 


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

 


Nick: Yeah, yeah.

 


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

 


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

 


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

 


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

 


Marc: There’s always something, right?

 


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

 


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

 


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

 


Marc: You mean a jump in the premiums?

 


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

 


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

 


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

 


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

 


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

 


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

 


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

 


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

 


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

 


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

 


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

 


Marc: Okay. Yeah.

 


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

 


Marc: Makes sense.

 


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

 


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

 


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

 


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

 


John: Yep.

 


Marc: It’s Groundhog Day.

 


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

 


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

 


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

 


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

 


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

 


Marc: … inflate it a little bit.

 


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

 


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

 


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

 


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

 


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

 


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

 


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

 


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

 


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

 


Nick: For sure.

 


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

 


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

 


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

 


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

 


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

 


Nick: See you.

 


Marc: All right, John. Thanks, buddy.

 


John: Sure.

 


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

Ep 57: Retirement Expenses For Which You Forgot To Plan

On This Episode

Are you preparing for retirement but feeling confident that you have covered all the expenses? Well, think again… It turns out that many retirees overlook some crucial expenses that can leave them financially vulnerable. In this episode, we explore the retirement expenses that most people tend to forget, including skyrocketing medical bills, unexpected travel costs, taxes, and much more. We’ll discuss practical tips and strategies to help you plan for these expenses and ensure a secure and comfortable retirement.

Subscribe On Your Favorite App

More Episodes

Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Marc: Hey everybody, welcome into the podcast. Thanks for hanging out with John, Nick and myself here on Retirement Planning Redefined as we talk, investing, finance and retirement with the guys from PFG Private Wealth. And this week we’re going to get into retirement expenses for which you might have forgotten to plan for, which certainly happens. So on this episode, we’re going to discuss some practical tips and strategies to help you plan for these expenses and maybe secure a more comfortable retirement. Guys, what’s going on Nick? How are you buddy?

 


Nick: Pretty good, pretty good. I got some friends coming into town next week and then family trickling in over the next month, so it’s going to be a hectic month.

 


Marc: Yeah, that’s not bad though.

 


Nick: That time of year.

 


Marc: There you go. And spring is upon us, so that’s always good. We’re into March, so that’s a good deal there. John, what’s happening buddy? How are you feeling?

 


John: I’m feeling okay. Getting there. Getting a little stronger each week so excited about that.

 


Marc: There you go.

 


John: But feeling pretty good. We just wrapped up our golf tournament, nonprofit charity golf tournament.

 


Marc: Oh, fantastic. Yeah.

 


John: And looking really good. It was a great time. Nick was out there helping me out because I couldn’t lift anything heavy, but it was a great turnout. And it’s year three and looking forward to year four. So.

 


Marc: That’s awesome. Yeah, fantastic. Always good to hear those success stories. So let’s share some things this week. Let’s get into the podcast here a little bit and talk about some expenses that we might encounter in retirement. And maybe we planned for them, maybe we haven’t. Hopefully we have. But let’s start with a big one obviously, medical expenses. I mean, typically they outpace normal inflation a lot of times. It seems like medical’s just constantly on the rise. So how do we address some of this stuff?

 


Nick: Yeah, what’s actually been probably at least most recently with a bunch of our clients, the dental expenses have been pretty wild. I know my parents have kind of run into this too. It seems like once you get into your sixties almost everybody has some sort of major dental work and it’s almost impossible to get out of there for less than 10 grand. So it’s interesting too because without going on a massive tangent, dental practices and offices seem to have really gotten down the financing aspect of things. And really they tend to run the businesses pretty tight and costs have gone up pretty substantially.

 


So yeah, those dental expenses can be a big deal. We tend to make sure that we have a fair amount of money budgeted each year for healthcare related expenses for clients and making sure that we’re allocating the right amount for insurance premiums in that sort of thing. But yeah, those numbers really do add up over time.

 


Marc: Yeah. They can get pretty staggering. I think it’s what is the average person what, $250,000, something like that in retirement and medical expenses. So I certainly can take off there for sure.

 


John, what about unexpected travel? Obviously that’s one that when we think about travel as part of our retirement strategy, but where would we find unexpected travel in that situation where it kind of creeps upon us and costs us more than we realize?

 


John: Yeah, so one thing we’ll always say is things are always going to come up, you can plan as best you can, but something’s always going to come up whenever life happens. So we’ve seen a lot of times where it could be funerals, long distance where people are having to go places they weren’t expecting to go, obviously. And just hotels stay, travel, whether they’re for a week or two, seeing some of that. Or caring for family members that don’t live in the state. So it’s traveling other sides of the country. We’ve seen that quite a bit.

 


Marc: I’d say, that’s probably a pretty big one, especially for as your retirees, you might have to go take care of a sibling or something who’s having a long-term care event, extended stay. I think my sister had to do that a while back as well. So that’s a great point.

 


John: And then there’s always the, which I think we’ve all experienced the destination wedding invite where it’s like, oh man, do I really want go to this place? And it’s just like, okay, all right, let’s start adding up the cost. And if it’s a family member, you typically feel obligated to go.

 


Marc: Yeah, so that’s good point.

 


John: Those are some of the top three we’ve seen in our practice.

 


Marc: Do I really want to go to Cabo? Yes. Do I really want to go for my niece’s wedding? No.

 


John: Sounds about right.

 


Marc: Yeah. or something like that. Right. So definitely some places where expenses can come up. The medical obviously certainly can get really costly, but then again, so can parental or child assistance. I mean, Nick, more people now are than ever are in the sandwich generation where they’re taking care of maybe an adult child to some degree, helping out and they’re also taking care of their own parent. That’s one thing I’ve heard about.

 


Nick: Oh yeah, yeah, so the child’s assistance thing, we saw it quite a bit like back in the years, immediately following the great recession, was kind of the first time I had seen that quite a bit where kids were getting out of school, graduating from college and having a hard time finding a job. So back to the parents and some help and that sort of thing.

 


Marc:

And then we got that again in the COVID too.

 


Nick: Yeah, exactly. That’s what I was going to say. From the standpoint of when COVID hit, that was something that impacted quite a bit. The job market’s still pretty good for a lot of fields, but have definitely seen that. And I would say a lot of our clients are also entering into that period of time where there’s more assistance needed for parents. My grandmother’s been living with my parents for, I want to say over 10 years now, but she just turned 90 and now it’s becoming even tougher. And we hear about that quite a bit from clients. And then if their parents are out of town, that’s some that have brought them into town or they travel fairly regularly to go see them. Yeah, it’s a lot on the plate.

 


Marc: And that’s an expense that can really derail your retirement. I imagine thinking using your parents there as an example, if they weren’t prepared for 10 years of taking care of grandma, I mean that’s an added expense that you just weren’t planning for.

 


Nick: Yeah, there’s the financial aspect and then even from the standpoint of we are focusing for this on the financial side of things, but even from a lifestyle and mental health standpoint or even just your ability to be able to do the things that you planned and wanted to do, whether it’s travel, that sort of stuff. It can be difficult, for sure.

 


Marc: Sure. Yeah, definitely affects the family dynamic along with personal relationship and everything because it’s a full-time gig. It can be, for sure.

 


Nick: Oh yeah.

 


Marc: So a lot of times we are focusing on the expenses here, but that’s a good point to bring up as well. So planning and strategizing for those things that can maybe be overlooked or forgotten, certainly important. Taxes, John, is the next one. Now we got a plan for taxes, hopefully we’re doing that. But are we thinking about the possibility of a tax hike because it sure does seem imminent.

 


John: It does, doesn’t it? You figure with all the spending happening, at a certain point, taxes we’ll have to go up. But that is definitely one that I know we cover quite a bit in our planning is making sure clients are flexible and to adapt in an environment where if tax rates do go up, we really try to make sure people have the ability to adapt to the situation. But I will say this is often overlooked where it’s, oh, you’ll have less income. So your funnel, lower tax bracket is kind of what you normally hear, but it’s definitely something that you want to be able to adapt. So perfect example of this, having some tax free money into retirement where tax brackets go up, you can basically say, Hey, this next three or four, five years, I have at least some Roth IRA money I can pull from where it’s not going to really impact my lifestyle too much. But taxes go up 7%. That’s a big, big dip in your nest egg or your living, your lifestyle,

 


Marc: Especially if your income stays the same. So your income stays the same when your tax rates jumps from you said what, 7%? So let’s say we go from 25 to 32, that’s not so great, you’re not going to feel so good about that.

 


John: Yeah, and something else I’ll say we see quite a bit with this is where there’s big expenses in a given year. So we talk about, I know I think we’re probably going to touch on it later, but if there’s like a home remodel expense or whatever it might be, or we had the recent years with COVID, like, hey, I want to buy an RV or whatever it might be, it’s big purchases can also affect those where you might be pulling out 50, 60 grand extra in a given year and if all your money’s pre-taxed, that’s going to be a pretty big hit to you in that year.

 


Marc: And that’s a good point. So Nick, I know you’ve got a list of a few things to think about in that department from maintenance or repair. Now again, we could strategize for the RV, we could strategize for, and I think this is maybe the point people missed, you tell me if I’m wrong here Nick, but if you’re getting close to retirement and somewhere in retirement, you’re going to probably have to replace your roof, start planning for that so that it’s not an unexpected expense versus just going, oh well now we found out the roof is damaged and we need to repair it. That’s a little different. So I don’t know, what do you think?

 


Nick: Yeah, for sure. From a planning perspective, the way that we typical typically handle that is we have home maintenance and repair expenses on an annual basis and then we will oftentimes every X amount of years add in an extra bump so that we can show people how we model that out and try to factor that in and build that in. But yeah, absolutely. One of the things that I’ve seen too is I guess and this is definitely not for everybody, but there’s a fair amount of people that like to purchase vehicles cash and just not having the car payment. And that’s something that has been a transition for a bunch of clients where just kind of emphasize with them, they may keep a vehicle for 10 years and so when they do make that new purchase, if we’re taking money out of qualified retirement accounts to do that, you’ve got to take out X amount more and then that hits you from a tax perspective, where really stretching out the payment, taking advantage of lower rates that dealers often offer. Just even little things like that where you may tweak how you’ve spent the funds on certain expenses in the past to just take into consideration what your new reality is in retirement.

 


Marc: Yeah, definitely.

 


Nick: It’s important.

 


Marc: Yeah, if you strategize again, you won’t be caught off guard by some of these expenses that you didn’t plan for. But John, the last one, I mean we got caught off guard for sure on the last one. Many people don’t plan for inflation normally, even when it’s in a normal 2% or 3%, let alone what we’ve just been going through.

 


John: So yeah, the last couple of years have been interesting for inflation. In a normal environment, it’s obviously not this type of hike in a given year. I mean coming out of a pandemic and then obviously with the Fed raising rates the way they have been doing to try to combat some of that. So normally it’s pretty slow and then all of a sudden it’s like you go to the grocery store and it’s like, whoa, what just happened? I’m paying almost 20% higher for milk or whatever it might be. COVID definitely made things interesting with the supply chain, everything like that, which added to it, which we’re starting to see come down a little bit. But this is a big one that you definitely want to put into your financial plan and you want to stress test the plan saying, Hey, what if inflation does hit 2%, 3%? It’s something that we typically do as well. And if you’re working with somebody, you should do is different categories have different inflation rates. So one thing with medical is historically that has been higher than the normal inflation, which you said would serve around 2%. We normally inflate that about 4%. And if you’re planning to pay for, at this point, most people when they retire aren’t paying for kids’ education but might be paying for grandkids because that’s what they want to do. So you got to pay, that has a different inflation rate. So it’s cool to be able to adjust each category with a different inflation rate when you’re doing planning. So if that’s something you are working with an advisor, you want to ask that question, is the inflation rate you’re giving me kind of general over everything or are we actually putting different inflation rates on different categories?

 


Marc: That’s a great point.

 


Nick: And just to jump in here on this one too, obviously inflation has been in the news so much lately. One of the conversations that we’ve been having with people is that really from the standpoint of news, the inflation that they report on, what CPI is really such a specific bundle of goods. Anybody that’s been paying attention to expenses over the last five, six, seven years, they’ve been going up. And so just kind of reminding people that this is happening every year. We just get really mad about it every 15, 16, 17 years, over and over again, rinse, repeat. And so really making sure that they understand that. And also just to another take on the inflation side of things is when they’re looking out over the nest egg and the plan and they kind of look to see, all right, well, I’m going to have X amount of dollars in 20 years, or I’m targeting to try to have X amount of dollars in 20 years or at life expectancy and making sure that they understand, hey, is that in present value? Is that in future value? Because 20, 25 years down the road, that number can start to seem a little, if things are going well, like unwieldy or super optimistic when in reality it could be just when you use the right and when you look at it the right way it’s similar to where you’re at today and stuff like that. So just not having that false sense of security if it’s not warranted is always important. But yeah, inflation’s an important topic.

 


Marc: Yeah, I mean you got to plan for these expenses. Some things we can’t plan for, but many can, or at least we can try to somewhat strategize for things we think are going to happen because inflation’s always going to be there, tax rates are always going to be there. We don’t always know what they’re going to be, but then some of those other items we can certainly try to strategize for. And by not having the conversation, you’re certainly not doing yourself any favor. Let’s finish off with an email question, guys, whoever wants to take this one and we’ll wrap it up. Thomas wrote in and he says, “Look, we’re retiring in two years and plan to sell the house and move to the beach, and values are still pretty high in my neighborhood to sell the house, so I’m wondering if I should sell it now even though we’re not ready to move and just rent a couple years.” His overall question is, “It a bad idea to rent at this stage of life?”

 


John: Yeah, that’s a great question. This seems to be coming up quite a bit with what we’re kind of seeing happening in the housing market right now. I wouldn’t say it’s necessarily a bad idea to rent at this stage of life. I’d more look at it from what’s going on in the housing market, the economy. So that type of strategy right now could be a pretty big risk depending on what happens. Example, if you were to sell your house and anticipate buying in a couple of years. If house prices, again, who knows what’s going to happen, dramatically go up over that next two year period, you could be putting yourself in a really bad position financially depending on what happens. I talked to someone who actually did something like this during COVID where they said, Hey, house prices went up a little. It was right when the boom kind of started where they looked at it and said, house prices are going up. They’re really high. I think they’re going to go down like they did in ’08 and this gentleman sold and then two years later, I mean they kept going up.

 


Marc: Right.

 


John: So now basically he’s caught in a tough spot where he was renting for a couple of years and for him to get back into the same house he just sold, I mean he’s paying almost $200,000 more. That’s a big swing. So I don’t know if it’s worth a risk, let’s put it that way, to do that type of strategy because none of us have that crystal ball.

 


Marc: Yeah, it’s an interesting proposition. A friend of mine did exactly this, Thomas. So he sold his house at the peak actually about eight months ago. I guess maybe that was the peak in this area or that area. But yeah, he decided he was going to get an RV and just drive around camping for a while and he is waiting for the housing price to come down before he goes and gets another place. So he banked on that strategy. He feels like he made the right decision. He’s enjoying the RV time. But every scenario is going to be a bit different with this, to John’s point. So I think it’s always worthwhile to kind of crunch some numbers, run some numbers, get a strategy put together and just stress test some things. Not only just that question from the email this week, but just a general topic that we talked about this week. Have a conversation with a financial professional like the guys at PFG Private Wealth. Get onto their calendar, have a chit chat with them. Stop by the website, check it out at pfgprivatewealth.com. That’s pfgprivatewealth.com to talk with John and Nick and the whole team at PFG Private Wealth. And don’t forget to subscribe to us on Apple, Google, Spotify, whatever platform you like to use. We appreciate your time, as always. Thanks for hanging out with us. For John and Nick, I’m your co-host, Mark. We’ll catch you next time here on Retirement Planning Redefined.