Episode 526 – First Years of Your Retirement: How Best to Prepare

Welcome to the Your Life Your Wealth podcast with John Walker and Jason O’Meara, helping you find clarity and comfort for your life and wealth.

John Walker:
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you. And today we’re gonna talk about, I think, a really interesting topic. It’s something that we help families navigate all the time, and that’s the difference between what we would call lifespan and health span. And when we think about financial planning, a lot of people focus on, you know, probably the most important question, which is how long will my money last, and it’s really important, but it often overlooks some other really, really important conversations like how will I spend this money, how will I fully enjoy retirement, and how long will I have in those healthy, active, go-go years. And so, to have that conversation with me, as always, let me welcome in my good friend and colleague, Mr. Jason O’Meara, a certified financial planner™ and market leader here at Mercer. Jason, thanks as always for joining me.

Jason O’Meara:
Of course, John. Thank you.

John Walker:
But we’re going to bring in the big guns today, Jason, and have some real help as we address this topic. And it really came to the fore because of a great article called “Why Getting the First Years Right May Matter Most,” written by one of our awesome colleagues, certified financial planner and wealth advisor here, Ms. Alexis Dudley. Alexis, thanks for joining Jason and I today.

Alexis Dudley:
Thank you, John. It’s great to be here with both of you.

John Walker:
And Alexis, I think what really stood out from your article and what folks maybe would be really interested to hear about is this idea of lifespan versus health span, right? This, how do we plan so that you can actually really enjoy what retirement looks like, right? There is sort of a cadence, a flow that often happens to people, but it’s really a difficult idea to, or a really difficult timeline to pin down, right, because we don’t know what the future may hold for us. So, you know, how do you approach that? How do we help families understand how long their money will last in a meaningful way?

Alexis Dudley:
Yeah, I think that’s a great question. I think it goes back to the foundation at Mercer of why financial planning is so important. It’s a very personalized experience that, you know, I think early on in any client relationship, we want them to see the value of, and a lot of times in the beginning of those relationships, we’re asking questions that they’re not used to hearing somebody in a financial lens ask them, like, you know, what are your goals, what does travel look like in retirement, what does family support look like?

And being able to answer those questions and then put it into the financial plan is what really guides that retirement lifestyle, I think too, and it’s just, it’s important for clients to know how deeply personal a financial plan is meant to be, and giving themselves kind of the ability to dream and think about, you know, what does health span mean for us, when does my retirement really need to start so I can take advantage of that, and then how do I partner with Mercer to make that happen?

John Walker:
Yeah, yeah, I think it’s Jason, we talked to a lot of families together and, and I think you share a lot that, you know, retirement spending really isn’t something that kind of stays level throughout retirement. We build plans often to reflect that it will, you know, we will take spending and model it out over the decades of likely what their retirement will look like, but in reality, there really are phases to what that retirement looks like.

Jason O’Meara:
Right, and we talk about it all the time and actually Alexis’s article covers it nicely, which I’ll start referencing. When we talk to the families we work with, we usually talk about those go go years, those slow go years, and those no go years, right? And every time a client hears that for the first time, they always laugh, and then you watch the realization sink in what that truly means, and that’s when you can start having real meaningful conversations about what are your goals around retirement, and Alexis brought up a good one, travel, right?

You’re not gonna be most likely, although I do have a couple of families that do travel well, they’re well in their 80s and they’re still globe-trotting when I just wanna be them when I grow up. But you know, it’s, there’s a realization that your health may not allow you later to do these things that maybe you shouldn’t be putting off, and your article put it nicely. Are you putting it off because of habit? Habit of saying, I can’t do this when there’s no reason right now stopping you. Alexis, you know, how do you broach that conversation and what are some of the things you’re seeing out there, you know, as you’re talking with them, it’s like, what are some of the reasons that they’re either not doing it or, you know, how do you overcome that for them or help them overcome that?

Alexis Dudley:
Yeah, I think a lot of the time it comes from that issue with habit. You know, I think a lot of people worry that they’re gonna run out of money. And so one of the ways that I try to kind of explain or show that that’s not a concern or that we maybe, you know, we need to think about it, but it’s not as big of a deal as they think, is by showing in the financial plan what we call a max spending scenario.

So, this sometimes can look different for everybody. A lot of times we’re just inflating expenses at a larger amount or adding expenses to show, you know, what would it look like if for 15 years we’re traveling a lot and then that kind of tapers off. You know, Jason, I would say my clients are very similar. I don’t have many that are globe-trotting, globe-trotting at 80, but I would love to be one of them when the time comes. But I think it’s, you know, kind of explaining to them how the go-go years, slow go years and no go years can feed into the financial plan and adding expenses to kind of show, maybe travel is 200% what it was before retirement for 10 years, then it drops to 150 and then it goes back down.

And travel looks different too for a lot of clients as they age. I tell some clients, you may be spending the same amount of money as if you were going to Italy and back, just by buying a really nice beach house on, you know, in a nice area and then inviting your entire family and hosting them. So that’s still a way that, you know, expenses don’t look the same for everybody. But it’s really that habit that I find is why they don’t think that they have permission to spend early in retirement sometimes, and it’s often we’re the ones that are giving them permission and the comfort level to, you know, go out and accomplish the dreams. I tell some clients, I know you’re not retiring at 60 to really enjoy your 80s. You’re doing it to enjoy the 60s and 70s and 80s altogether, right?

John Walker:
I think that’s such an important point because I think the habits that often allow people to reach that stage of retirement can be very difficult behaviorally to overcome, and we’ve spent a lot of time on this show talking about those behaviors and how those disciplines are difficult to unwind. But we had a family we work with, and Jason knows this story, that might be listening now who coined it as verifiable permission, right? She would throw scenarios at us and we would use the plan as a tool to give verifiable permission, right, even though maybe sentiment and her feelings thought, hey, we can probably afford to do this, seeing it mapped out in a plan, seeing how those choices impacted the overall success percentages gave her comfort and clarity in saying like, yeah, no, we can do this.

And you’re right, Alexis, I love how you said that because travel, travel is one thing, right? It’s one way that people like to maybe ramp up their spending, but it’s not the only way, and it’s part of our work together with those families to identify what is that purpose, what, how do you want to use these resources. Jason, you say it to families all the time when we meet with them. It’s just a tool, right? It’s just a means to an end, right?

The wealth that you’ve created has allowed you to now determine, hopefully and have choices and options as to how you’d like to spend it. And there does, you know, those go go years, slow go years and no go years. We don’t know what that timeline will look like for your family, but we do have a good track record of understanding that that will likely happen at some point, right? And hopefully you have a long time of healthy, you know, years to do all the things that you’d like to do, but inevitably time will tell and you’ll have those likely physical or other types of limitations that will, you know, restrict what your spending potentially could look like.

Jason O’Meara:
Yeah, I’m going to just quote Alexis real quick because I found this quote that I found that I really like here, and it’s, I think it’ll just put a nice little cap on what we’re talking about here. “A dollar spent at age 65 on meaningful travel, family experiences, or a long delayed personal goal may create significantly more value than the same dollar preserved for age 85 when health and mobility may be more limited,” and I think that’s a phenomenal quote because it’s 100% true, and it’s, you know, it’s kind of what we do as financial advisors or wealth advisors, financial planners on helping people understand that sometimes a penny spent is better than a penny saved, and we’re all used to the old adage, a penny saved is a penny earned. Sometimes that doesn’t actually help you get to your goal.

John Walker:
Absolutely. And Alexis, you talk a little bit about in that same part of the article about, I think the other big hurdle, which is the fear of overspending early in retirement, right, and how sometimes intentionally front loading experiences rather than delaying that gratification. It is what Jason’s talking about there. It’s much more meaningful even if it does create a smaller, you know, number at the end of the plan, right?

Alexis Dudley:
Yeah, absolutely. I think, you know, throughout our working years, we’re taught to save and delay gratification and really think long term. Once you retire, you know, I think delaying gratification, saving, those are great habits when you’re accumulating wealth, but they don’t give a good, I think, precedent for retirement and what it looks like to really enjoy and spend. And spend without necessarily having that income coming in each month in the way that you’re used to it.

So, a lot of times the way that we kind of overcome that is by setting up monthly distributions for clients or sometimes it’s, you know, semi-weekly so that they can go and kind of feel like they’re getting a paycheck and that removes some of the hurdle. But it’s all really done to make sure that we’re taking care of the risk of regret. You know, I think market risk is something we talk about with clients all the time. Risk of regret, maybe not enough.

And it’s just making sure that our clients aren’t, you know, coming to their late 70s, 80s, and feeling like they didn’t get to have those dreams when they had the health span to do so, had the healthy, you know, active lifestyle, and so it’s just making sure that our clients are really living the retirement that they envisioned and the one that they told us they wanted, you know, as we were doing the retirement planning.

John Walker:
Yeah, I think that’s such a good point, right? There’s this fear certainly of not spending the money correctly. What happens if, right, and the industry, the environment that we operate in has created a fear in families around things like, as you said, Alexis, market risk, sequence of return risk. What happens if the market bottoms out the year I retire, right?

There’s articles every day written about these types of things, and so that fear often paralyzes families to feel compelled to make choices that they want, and they delay and they delay and they delay. And just like we see with trying to time the market, you’ll never get it right, right? It’s impossible to time it right, and that, inevitably or unfortunately we all probably have in our career those stories of folks who delayed and delayed and delayed and then their life changed, right? They could have, they put off things that they could have done that we tried to encourage them to do, that their assets allowed them to do, and now something else changed. Their health changed or their family environment changed, or, you know, now they have put off all those things that they had intended to do. And instead of taking that, you know, big family vacation to Italy, Alexis, now they’re taking care of a loved one who’s ill, you know, or those resources are being reallocated.

And so a lot of the work we do, and Jason’s sick of me saying this, we talk to families all the time about what’s your purpose, right? What is your purpose? What brings joy and meaning in your life? We can come up with strategies for anything, right? Whether they’re tax-oriented, investment-oriented. How do we understand, and that’s what your purpose is, and that’s how planning, when done properly, can be, is so different than just a numbers conversation, right?

And Alexis, you talk about this in your article about understanding, you know, what are the questions you should be thinking about, things like, are you postponing those meaningful experiences, right? So talk a little bit more about some of those things you ask families to say, you know, the people that are listening should be thinking about, like what are the things they should consider as they approach this stage of retirement.

Alexis Dudley:
Yeah, I think for clients that have kids, a lot of times the conversation is, you know, are you prioritizing inheritance goals over present-day quality of life and present-day things that you can do for your family. So sometimes I think clients, you know, they think of the way to take care of my family is to leave a legacy or leave an inheritance behind. And oftentimes when I’m doing multi-generational planning where, you know, the clients, longtime clients, children are also clients, it’s, you know, we find that there’s ways to help while you’re still alive too, and those are very important.

If, you know, you have grandkids, sometimes it’s, you know, making sure that they can afford maybe to have a second home near their grandkids to be able to help care for them, that alleviates the burden for their children, if they’re both working. I think there’s a lot of ways to kind of poke and ask questions of, you know, why are we talking so much about inheritance? If it’s clear that family is a value of yours, do we need to maybe be shifting the conversation to what are ways that we can help now?

And then financial decisions, are they aligned, you know, with the retirement that you actually want, or are you concerned about other things that really, you know, maybe we need to unpack and think about, and a lot of times I find, you know, when clients are really fixated on things like Social Security timing or, you know, whether to take a pension with a benefit for their spouse or not, those questions sometimes you just need to remind clients too that we plan for clients all the time to experience these, and it’s something that builds into the financial plan, yes, and we can talk about what a lot of people do, but it’s very personalized.

It’s all about, you know, and I wish we knew lifespans when we’re talking about things like that, but it’s all a very, very personalized plan and we need to, you know, make sure that we’re covering those questions and answering the why behind things before we just give, you know, advice on when to take Social Security, when to start a pension, things like that. So it’s making sure that you really know the client, and it takes time.

John Walker:
Yeah, I love that. Jason, you do this too. I’ve been in meetings where we spend time together talking with families like around these types of things because Alexis is right, right? People come to us and say like, well, when should I start Social Security? Or how do I navigate Medicare? And I don’t mean to diminish them. They’re incredibly important conversations and they have real life impacts, right? There are material, material impacts to those decisions. But reframing that to, you know, OK, that’s an important question, but let’s go back to the real important things here, right, which is like, where are you going to live, you know, how do you want to spend that time?

And Alexis, I love that you reframed that to, you know, we focused earlier on like people think about travel and golf and, you know, whatever it is that their passion has been maybe that they’ve been delaying and now they’re excited to do, you know, a hobby that they really want to invest time in. But for a lot of people, it is family, and that new budget, that increased spending may be allocated towards, you know, I want to see my grandkids every day, right? And so you’re spending extra money for the 4 or 5 trips a year that you are taking now to go visit your kids across the country or whatever your family dynamic looks like, right?

And Jason, you do this too, right? Talking to families about, you know, where do you want these resources allocated and is it better maybe to spend some of them now than just like, you know, delaying it and delaying your gratification, you know, maybe it’s more important to allocate these resources to the people you love when they actually need them.

Jason O’Meara:
Yeah, well, Alexis hit the nail on the head there when she said, you know, they’re asking questions, but really there’s a question behind the question. And what we usually see is we get asked the how or what questions, and it’s up to us to ask them the why questions, right? So we get asked how do I, when should I take Social Security, how should I elect this benefit. It’s up to us to come back and ask the why question, which is getting to what is the actual purpose behind this, or actually, Alexis pointed something out that I love that I want to go back to you for a second, you know, is this retirement plan of yours what you want or is it what you believe is what retirement’s supposed to be? I don’t know,

Alexis, I’m sure you see this too, where I have conversations with families that I’m working with and I’m asking the question of, hey, what does retirement look like to you? And they’re like, it’s retirement, and I stopped working and then, you know, I sit on the couch for all day and I play a round of golf in the morning or whatever it is, right? And I get into more deep conversations and I find out that’s going to be miserable for them. That’s not at all what they actually want. That’s just what they think retirement is because that’s how it’s been portrayed on TV and, you know, maybe that’s what their dad did. Who knows.

Alexis Dudley:
I’m so glad you said that too, just because I think a lot of people when we ask them, you know, what does your retirement look like, they say, well, I’m not working, and I find that that is where we have the most work to do on retirement planning because a lot of people think, you know, I’m not working. That’s all I wanna do in retirement is just not have to go to work every day. But that’s 40 hours, you know, at least each week that somebody was spending around other people, socializing, like knowing that they had a value associated with their time.

And when you retire, those 40 hours, it can be hard to fill if you don’t have hobbies and, you know, you can only spend so much time on the golf course, you can only spend so much time, you know, doing any one thing. So I really challenge all my clients to fill those 40 hours in a really impactful way, especially early in retirement. And sometimes it’s, you know, having different hobbies than your spouse too, so that you get to meet, you know, a new community and really being able to just enjoy that time and not, you know, stay at home, and a lot of times when they do that, that’s when they end up going back to work and they find that they actually didn’t mind, you know, having 40 hours taken up every week.

Jason O’Meara:
Because I always talk to clients, I always say, you know, arguably in my opinion, the best day of the week is Saturday, right? Everyone loves Saturday. Saturday is fantastic. Sunday, I’m kind of thinking about Monday, you know, Saturday is my real day of just not having to do anything, right? But that’s only because I’m comparing that to Monday, Tuesday, Wednesday, Thursday, Friday, right?

When I have six months of Saturdays, my Saturday may not feel as special anymore, and you know we had that conversation. It’s like, so come back to me in six months and tell me you’re happy with what you’re doing, then fantastic, we’re doing the right thing. If you come back to me in six months and say I’m losing my mind, what am I going to do? That’s when I’d say retirement isn’t stopping. Retirement is transitioning to something else. You know, get that mindset shift that we always talk about, and if you’re playing, John, there should be a bingo game that goes with this podcast.

Every time we say a catchphrase like, you know, mindset shift or transition or rules of thumbs are lazy, people should check a mark. But the reality of it comes down to, it’s because those themes kind of weave through everything. So, you know, once people are in retirement though, maybe we can strategize around income and strategize around the investments being short-term assets, intermediate term assets, long-term assets, that bucketed approach, is that something you’ve been seeing, you know, popular with maybe the families you work with or through other advisors you talk with?

Talk to me a little bit about how you structure those ladders.

Alexis Dudley:
Yeah, I think the bucket strategy and then also asset location, those are two things that we talk about a lot when we lead into retirement planning. And I think, you know, a lot of it is making sure clients are aware that that’s something that we think about and that’s planning that we put in place. The bucket strategy, you know, being that we have short-term assets like cash on hand to be able to fund those early expenses without necessarily running into risks of market risk, you know, or market movement that can happen.

So, it’s making sure that the clients feel really comfortable. I think even, you know, an emergency fund is not a one size fits all. I liked what you said about rules of thumb. I think that’s really important, especially when clients are starting retirement is, you know, how much cash do you really need on hand to accomplish some of those big early on goals, and then the intermediate term investments that would be, you know, like the fixed income, the bonds that we keep in portfolios, and a lot of times risk tolerance changes too as retirement starts.

So that’s a big conversation point to have with clients, making sure, you know, hey, are you still comfortable with the amount of risk in your portfolio? Is it necessary at this point or is it becoming a little bit unnecessary? Maybe we can shift down and try to do so in a really tax-efficient way. And then we still know there are long-term growth assets that, you know, might not be needed for a long time, and how we structure that for every client is different. Sometimes it’s, you know, if they have plenty of different types of assets where it’s taxable, tax deferred, and tax-free, we don’t have to have a one size fits all in all of those accounts then, so that’s something where it’s a very deeply personal investment strategy along with a deeply personal financial plan.

John Walker:
I think that, you know, lots of different ways to approach this. Some folks, you know, laddering out assets, bucketing those assets, right? But having a plan to support those bridge years between retirement and maybe where other fixed income sources come in like Social Security or pensions or other things so that maybe families feel a little more confident spending. And spending intentionally during what will hopefully be their most active years, right, those go-go years, and you’re right, asset location is really critical too, right? How are things going to be taxed? How are we going to preserve those resources with tax efficiency in mind? That’s all a part of this conversation, but it really at its core goes back to where we began this conversation, which is, does your plan align to your actual priorities and what you really want to experience in retirement, right?

And Alexis, you ask in your article, you know, what experiences matter most in the first 10 years of retirement, right, because that’s really your earliest opportunity to start maybe increasing spending or increasing gifting or getting out of that comfort zone, right, of what life has looked like while you were working. You know, that I think is really, really at the core of what we’re talking about here today, right? Getting families reoriented to, you know, there will be a life cycle to your retirement, right? And we will plan, which hopefully, you know, we run plans out to families living, you know, each member living to, you know, husband and wife as an example, living to 95 each, right, or 100 each. And Jason, inevitably we get chuckles every time we show families that too, right? Like that’s never going to happen.

Well, statistically it might, right? And so it’s our job to make sure that the resources last that long, but inherent in that chuckle is, yeah, but by the time I’m in my late 80s, early 90s, people know that’s going to look a lot different, most likely than when you’re 50, right? And when you’re 60, right? We know that.

Jason O’Meara:
John, I mean, one thing that the caveat there is that I feel like a lot of people we meet or a lot of people I just talk to randomly, very few people think living too long is an actual risk, and in the retirement plan, living too long is a risk. You got to make sure that we’re prepared for those long-term, you know, that long-term.

So, while we’re saying, yeah, front load your travel and make sure, but if you don’t have an actual plan designed to show that longevity risk, right, how are you gonna know if you’re front loading too much, right? This is where the plan really comes into play is it’s gonna give you that permission, right?

That I think we said, was it John, but when you say the term was verifiable permission, right. The plan is gonna give you that permission to feel good about making these decisions today, knowing that you’re not trading your security, long-term security for these events today, but also making sure you’re not going the other way, which is giving up these because you’re over securing for the future, right? There’s that equilibrium, there’s another one of our buzzwords, the equilibrium we’re always trying to hit of spending today and saving for tomorrow, and how do we do that effectively.

John Walker:
So, at the end of the day, a retirement plan should support both your financial security and really most importantly, the freedom to enjoy the years that matter most to you. Alexis Dudley, certified financial planner™ and Wealth Advisor here with us at Mercer, thanks so much for joining us. This was a lot of fun.

Alexis Dudley:
I’m happy to do this anytime.

John Walker:
If you have questions about what we talked about today, if this is a topic that you’re thinking about, if you’re really struggling with this idea of when to spend and what retirement can truly look like, we’re always here to help. Email us anytime at jwalker@merceradvisors.com or jomeara@merceradvisors.com. On behalf of Jason O’Meara, I’m John Walker, Regional Vice President at Mercer Advisors. Thanks so much for joining us for the Your Life Your Wealth podcast. See you next time.

Announcer:
If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit merceradvisors.com.

This presentation by Mercer Global Advisors Incorporated, also known as Mercer Advisors, was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer Advisors. All expressions of opinion reflect the judgment of the speaker as of the date of recording and are subject to change.