A recent study by JPMorgan looked at how people pay for retirement. It found that many people don’t spend their retirement savings wisely. 84% of people only take out the required minimum distribution (RMD) from their retirement accounts, and 80% wait until their legally required age before taking any money at all! This can be a problem because people might not use enough money to enjoy their retirement while they’re still healthy and active. All-the-while unintentionally leaving a considerable inheritance for others.
An example of how to do things right is my grandmother, who lived to be 100. My grandfather passed away before I was born, so Grandma enlisted the help of a financial planner who wisely showed her what she should and should not spend her money on during the different stages of her life.
Some of my greatest childhood memories are from Grandma’s visits. She would visit us frequently during her “energetic” retirement years, usually arriving with small gifts. When I was a young child, I loved the gifts. As I got older, they weren’t as exciting – probably because I knew they were coming. What really mattered by then was that she loved giving them and I loved seeing how excited she was to give them!
Something big happened on her 80th birthday. She used some extra money to take her kids, grandkids, and their families on a cruise. She still had a lot of energy then, but I think she knew things were turning. After the cruise, we started visited her more often because she couldn’t travel as much. She was always happy to see us, but she had less and less energy.
When she was in her late 80s, she moved to an independent living facility. She had a small condominium and by then didn’t spend much money. She still had many friends and stayed social, but by then she cared more about spending time with people than buying things.
Grandma seemed to hit the balance right between living her life and being safe with late life issues such as long-term care and helping family. I think it was due to her financial planner, but never asked the question.
Most people who spend only the RMD minimum do so because they are worried about long term care costs. This is understandable because long-term care can be very expensive and the actual financial cost is unknown; however, there are a several good ways to manage the risk:
- Long-Term Care Insurance: These policies can be expensive. For example, my closest friend’s mother pays $5,000 a year for her policy, and the cost keeps going up – even though she’s never used it. Also, these policies only pay a certain amount each day, in her case $250/day, and she might (probably will) need more than $250/day if the time comes. This means someone needs to fund the difference…
- Self-Funding: This means using your own savings and investments to pay for long-term care. This is an option if you have saved/invested a reasonable amount of money. It’s probably also what many of the respondents in the JPM survey do. These folks would typically use a financial planner, or financial planning software, to reduce the risk they will come up short if long term care needs occur.
- Financial Planners: Financial planners will help you design your retirement plan. They usually charge about 1% of the value of your investments each year, which can be expensive. But they can help you make smart decisions. They use special financial planning software to estimate “your probability of success” – how likely you are to have enough money throughout your life. They also consider things like how long you might live, inflation, and any big life changes you might have.
- Financial Planning Software: There is also software that can help you plan your retirement if you are more of the DIY type, or just don’t want to pay 1%. For example, I use (and we are an affiliate of) Boldin Personal Financial Planning Software (see our link below for a free two-week trial). Boldin has a wonderful onboarding interview that will ask most of the same questions as a Financial Planner, but instead of 1% of your assets, Boldin costs $120 per year. It is also quite complete in terms of what it offers. Bondin is easy to use and will give you your “probability of success,” using a powerful simulation model, so it’s quite robust.
- Spreadsheets: You could try to plan your retirement using spreadsheets, but this is complicated and you can easily make mistakes. I did this for a long time, but switched about 15 years ago to financial planning software.
So, when planning for retirement, it’s important to think about both enjoying your money while you’re healthy, and planning for the possible costs of long-term care and other late life expenses.
You need to balance saving money with spending it wisely. It’s important to consider all your options, including long-term care insurance, self-funding, and getting help from a financial planner or using personal financial planning software to get the balance right.
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**About Geoff Schmidt**
Geoff is an award-winning author, frequent public speaker, and CPA. He is a Registered Social Security Analyst (RSSA) and spent 25 years on Wall Street working at firms such as Deutsche Bank and Nomura. He has an MBA from the Kellogg School of Management at Northwestern University and is considered one of the foremost advocates for retirees and Social Security.
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