Elderly couple (illustrative).
(photo credit: REUTERS)
One of the most common questions I receive relates to how much money people spend in retirement.
According to conventional wisdom, individuals should plan on spending between 70%-80% of their preretirement income. But for those of you who read my column, you know what I think about conventional wisdom. In fact, when doing research for the retirement book I wrote a few years ago, I interviewed a very well-known economist, one of the people who preach the 70%-80% income model.
I said in my experience as a financial adviser who sits with retirees often, I can say they tend to spend more money than they spent in their preretirement years. After much back and forth, the interviewee said I might be correct in spending patterns of those who use a financial adviser, but for all retirees I am wrong. In true Israeli fashion, with a bit a chutzpah thrown in, I responded: “I don’t think that those with no savings, have debt and are living off of Social Security are reading your academic white papers. The people who are reading your material are the ones using a financial adviser, and they are being misled, because they end up spending more than you are leading them to believe they need.” Needless to say, that was the end of the conversation.Make a change
I recently met with an older couple who wanted to know if they could have a comfortable retirement without eating into their savings. They wanted to live off of their savings while helping out their children, some of whom were struggling financially.
The first step a retired couple in this situation needs to take is to review their investment portfolio. The couple I met with had plenty of assets, but they were not working efficiently for them. More than a third of their sizable portfolio was in cash, earning absolutely nothing. This couple had quite a few large-cap stocks, which were shooting off dividends, and they had a rental property, which shot off a bit of income.
In terms of income, they lived off their Social Security, rental income and the dividends they received from the stocks.
After looking into their assets thoroughly, it emerged that if they could just generate something on their cash, they would have plenty of money left over to help out their children.Tzimmer in the Golan
When a couple retires, they will often find that their expenses are different. It is therefore important to sit down and make a realistic new plan based on these changes. As I mentioned above, according to conventional wisdom, financial planners estimate that expenses drop by about 20%-30% once a person retires. This is caused by lower tax rates, no more money being fed into retirement accounts and no more mortgage. I am a bit more cautious with my clients, and I apply a basic equation: Leisure equals money spent.
Upon retiring, people find themselves with more free time, and they may want to use it to travel, eat out or for other leisure activities. In fact, the more time a person has available increases the chances that he will spend more money. Throw into the mix that as we all know it’s not so easy to make it financially for young couples in Israel; parents will want to help out their children. Whether it’s picking up grandchildren on Tuesday, which means pizza or falafel, paying for braces or special after-school activities, or taking the family away to a tzimmer in the Golan for a week in August, rest assured this all costs lots of money.
Money flowing out
Once the couple has worked out their possible expenses, a similar calculation of future income should be made. This should include any retirement and pension plans, income from investments and other sources of revenue. At this point it would be a good idea to find out the exact amount of help your children may need to supplement their income.
It is important to get a specific number. Leaving such sums open-ended doesn’t help either side. It’s no good for the retirees because they need to know how much money they need to generate for living, and it’s bad for the children because they have no responsibility.Review your investments
Once you have an idea of how much money you need, take a look at your investment portfolio. Try and figure out if you can generate the income necessary to live off of and help out your children. If not, any changes necessary to increase income should be made.
It may be worthwhile consulting with a financial adviser at this stage to both help make your portfolio more efficient and generate the income needed to achieve your goals. An adviser may be aware of certain products available to help you squeeze out more income without eating into your principal.
Plan properly and figure on spending more money than you initially projected. You can enjoy your retirement and help out your children at the same time.The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.