Ep 19: Dynamic Strategy: Retirement Income Planning Series – Part 4

Ep 19: Dynamic Strategy: Retirement Income Planning Series – Part 4

The Smart Take:

Life does not stand still. When building your retirement plan that uses investments to create and sustain your retirement income, it’s important to be mindful of certain changing or dynamic elements that may vary quite a bit over time. Tune in to our fourth installment of the series to hear how you need to organize your plan around dynamic market expectations, investment allocations, and retirement spending.

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The Host:

Kevin Kroskey – AboutContact

Disclaimer:                          00:03                     Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.

Walter Storholt:                00:10                     It’s time to Retire Smarter. Once again, thanks so much for taking some time out to come back and join us here on another edition of the podcast, Walter Storeholt alongside Kevin Kroskey. He is the President and Wealth Advisor of True Wealth Design

Walter Storholt:                00:27                     Serving you throughout Northeast Ohio. You can find out more about us and listen to more podcasts online at TrueWealthDesign.com. Just look for the podcast button and you can check out all the past episodes there. Kevin, thanks for joining us once again this week. How are you, sir?

Kevin Kroskey:                  00:41                     I’m good, Walter. Thank you for joining as well we are looking forward to doing some more retirement income, finishing up the series here over the next two episodes and hopefully bring a lot of value to the listeners.

Walter Storholt:                00:54                     Well, we’re in the midst of a five-part series, so if you haven’t heard the previous three parts as we’re hitting part number four on today’s program. Be sure to go back and listen to those last couple of episodes, and this has been a series about Retirement Income Planning, a buzzword, a concept that’s very popular, Kevin, throughout the financial world and the financial landscape. But give us a quick recap on where we’ve been and where we’re going to go today. Yeah, I guess

Kevin Kroskey:                  01:21                     First of all, and this is maybe, I don’t know, I see this happen a lot and probably a lot of people listening to this get invitations in the mail too, but you kind of almost have to be cautious whenever you hear Retirement Income Planning because a lot of times that’s code for an insurance salesperson trying to sell an annuity or something like that. And if you listen to these podcasts, you’ll certainly know that that’s not us. And I’ve given some good reasons as to why. But what we’ve done over the prior three episodes is really provide a framework to understand all these myriad decisions that somebody needs to make about under the presumption that, Hey, we have a good plan in place. You know, we’ve understood our lifestyle, we’ve taken our income from pensions and Social Security benefits that we may have, already made smart decisions on how to make those claiming decisions.

Kevin Kroskey:                  02:07                     We’ve looked at our lifestyle, we’ve understood how much it costs us to go ahead and maintain our lifestyle. Maybe we have a few things that we want to go ahead and add on to that in retirement now that we have additional time and some pent up demand to go out and do these things. It could be some fun things like travel, maybe you want to help out the kids or grandkids, you know, whatever it is that you want to do. But most people want to maintain their lifestyle and then have a few things that they add to it. There are certainly some spending changes that happen over time as we age that we need to go ahead and reflect on the plan as well. And then so as you go down that process, you start stress testing your plan. You know, how productive do my investment assets really need to be?

Kevin Kroskey:                  02:49                     So you know, whatever my lifestyle is going to cost me. Say on a monthly or a yearly basis and any shortfall that I have that’s not being met from my pension or Social Security, then obviously your savings and investments have to go ahead and make up any shortfall and you have to recreate that paycheck. So everything that we’re talking about under this retirement income series already presupposes that we’ve done that important work. And I’ll stress and underline and bold important because if you don’t do that work, you’re, you’re kind of going, you know, you’re going into the doctor and asking for a prescription of whatever sort of pharmaceutical drug you saw on the TV without having done any sort of analysis diagnosis before you’re actually getting into kind of fixing any potential problem if you will. So you don’t want to put the cart before the horse.

Kevin Kroskey:                  03:36                     You do need to do that planning work. But as you come out of that planning work, there’s really kind of a framework that we talked about in the first episode of you know, now that we have this plan and we have this decision to make about how we’re going to go ahead and create that income, make up any shortfall that our pension and Social Security isn’t meeting and we put it into two camps and. On one camp it was more of a guarantee based strategy using insurance products. We will talk a little bit about that and actually we’ll talk a fair amount about that in the next and final episode of the series. But the point that I always make is you already have some of that, you know, whether you have a Social Security benefit, you and your wife, if you’re married and maybe you had a pension where you worked at over the course of your career, you already have some guaranteed income.

Kevin Kroskey:                  04:21                     So it’s a question of, you know, should you add more to it versus having a different framework, having a different sort of strategy that is more probability-based so you’re not, you don’t necessarily have guarantees when you have a probability, even if you had said a 99% probability, even though that is quite certain in most cases, it’s technically not a guarantee, but it’s more of a probability-based approach where you’re using investments you’re using usually mutual funds, you know, filled with stock-based investments, bonds, real estate and what have you to go ahead and recreate this income. And one of the major risks that we talked about in the second episode was this risk of bad timing put simply retiring into the great recession of 2008 and 2009 where you see your investments go down by a lot. So that is definitely a major risk of falling, this probability-based approach.

Kevin Kroskey:                  05:15                     And so you still have to look at that. But if you’ve done your planning well and you’ve already done the stress testing and you’ve already measured both your need and ability to go ahead and take risks, you’ve already made some proper allocation decisions. When I say allocation decisions, you know, how much risk are you going to take, how much stocks are going to have in the portfolio? How much in bonds, can you afford to have in the portfolio? And you’re, you’re already matching up your investments to your plan. So you’re kind of mitigating some of that, that risk to begin with by just having a good plan in place. If that risk does materialize if you do retire into a very negative market environment, you know, say the first couple of years of retirement stock market goes down and maybe goes a lot, there are some other things that you need to do as you are working through that and namely, you need to.

Kevin Kroskey:                  06:04                     Allow stocks that have time to rebound. You know you’re going to go ahead and spend your more conservative assets your bonds that did well, your cash and kind of draw those down and give you more breathing room for your stocks to go ahead and bounce back like they did after the great recession in 2009 and frankly pretty much the 10 year since then. It’s been a really good 10 years after we came out of the Global Financial Crisis. But you have to go through that process and the prior episode to today, something that we called a very unexciting total return framework. And so what does that mean? And what I talked about there was, on one hand, you have an approach that pension plans have been using for at least a hundred years where the fancy word is asset-liability matching. So basically the example that I always use, you have Goodyear tire and rubber company in Northeast Ohio, part of the S&P 500 been around a long time. Had a pension, the plan pension plan is now frozen.

Kevin Kroskey:                  06:59                     They know what they have to pay out on a monthly basis to their pensioners and it’s a fixed amount. It doesn’t increase with inflation, they just have to pay it out as long as their pensioners live. And then obviously after they’re no longer living, those payments stop. So they’re investing with a purpose. They’re taking those assets that they have in the pension plan and investing to meet the liability and matching that. And it’s been going on for a hundred plus years in the pension world. And really what we need to do in our own individualized retirement plan and what we do for clients is the same sort of approach. The issue is when you look at the pension plan versus when you’re working with an individual or a family, there are some notable differences. One, we don’t have nearly as much certainty for the individuals that we do in the pension plan.

Kevin Kroskey:                  07:49                     Things come up, you know, life happens, you know, we do have not only inflation that we deal with over time that we have to keep up with to maintain the purchasing power for our lifestyle and maintain the things that we like to do. But life happens. You know, maybe there’s an accident or you know, God forbid something happens your son or daughter and you know, maybe they’re in a bad divorce and you need to help them out or whatever it may be. The point being things do happen. So we need to have a little bit more flexibility in our plan. And frankly, when we finished the recording last time, I had that kind of regret where it was like, man, I should have said this, or Hey, did I really make a good point on that? Walter, have you ever had any regret after you finished one of these recordings?

Walter Storholt:                08:32                     Oh, absolutely. Yeah. And back in the sportscasting days, you know, there’d be games or maybe it was a game-winning shot or a really good play and you’d have that immediate regret. And then afterward too, of like, wow, I really botched the call on that one. I should have said it this way, or did it much more exciting. You’ve got a player’s name wrong and you ruin the great call that could have, you know, lived on it in, you know, forever. And now it’s instead just a wasted couple, of air time. So I understand where you’re coming from.

Kevin Kroskey:                  08:58                     Well, I’m going to take the liberty and get a slight do over here. Is that okay?

Walter Storholt:                09:01                     Go for it.

Kevin Kroskey:                  09:03                     Alright, so we’re all human. We’re not perfect, right? As much as I may try to imply the same to my wife, but one of the things that, I think I probably stopped a little short of making this point, but in addition to kind of needing some additional flexibility when you’re working with a couple of you know, a single person for the retirement planning is that mathematically, and what studies have shown is when you’re going through these kinds of downturns, when you’re going through 2008 there’s a basic principle called rebalancing. So the simple example is if you have half your money in stocks and half your money in bonds and the stocks go down by a lot, you sell some of the bonds and you buy more socks that went down in price.

Kevin Kroskey:                  09:47                     It sounds easy. It’s kind of the basic tenant of investing where you want to buy low and sell high. So you know, you’re selling bonds that went higher and you’re buying stocks to went lower and completely rational. But anybody that lived through 2008 with a fairly decent amount of money, can probably relate that maybe was not the easiest thing to go ahead and emotionally do. It’s similar to an issue that I have is you know, the old diet and exercise. And particularly when I go out to dinner and I see all these great choices on the menu, and then I see like this little section, it says like healthy options and they look okay, but you know, they pale in comparison to those other ones.

Walter Storholt:                10:28                     You should just skip that section, they’re not going to be as good, you know?

Kevin Kroskey:                  10:33                     Right, I know what to do, but sometimes I don’t exactly do what I should do. So the same thing goes with rebalancing when you’re going through these negative market environments. But the example I give about, you know, Goodyear, when they’re just investing with that pure determination of, Hey, I need to meet that monthly pension. And if you look at their plan today, that more than 90% of the assets are in bonds because the workers are getting older. The pension was frozen in 2008, so more than 10 years ago now. So they’re kind of winding it down, as they wound it down, it’s gotten more and more conservative. That’s great. However, what the math shows is when you’re going through these downturns, when you’re going through these bad timing events, if you just use that simple rebalancing approach in this, again, this total return investing framework, you know, you have income coming in, you have stocks, bonds, real estate, you’re going to have some of your return from those things appreciating or depreciating in certain years.

Kevin Kroskey:                  11:27                     But you’re just going to have this, you know, kind of all-encompassing framework to go ahead and invest your money and you don’t necessarily care where the return comes from, whether it’s income or growth, but you’re just going to have this total return framework and you’re going to couple with this rebalancing. And if you couple it with rebalancing, the rebalancing bonus tends to be so significant during those down markets. You know, again, you’re selling bonds and buying stocks in late 2008 so one the recovery does come in in this case, March 2009 that you really do get some, not only did you manage your risk, but you also tend to capture a rebalancing bonus. And there was a smart guy, his name’s escaping me right now, but he’s an actuary out of Canada and he does a lot of research and writing our retirement income and particularly on guarantees.

Kevin Kroskey:                  12:15                     But this particular article I think was around 2006 and he showed clearly that if you just followed that asset-liability approach and you just kind of, you know, did not sell bonds to buy stocks when things got really bad out there that you’re actually leaving a lot of money on the table. So you know, that’s another reason. So having more flexibility because life happens and people need that flexibility. And also by having this kind of total return framework coupled with a rebalancing approach, you tend to have more money rather than just having a pure kind of pension style framework. So that was a point that I didn’t make in the last one. It may sound a little wonky, I apologize if it does, but the key is as we’re going through this, hopefully, that you see that there’s one, a good theoretical underpinning for what works and what doesn’t.

Kevin Kroskey:                  13:02                     There’s a lot of evidence-based approach stuff that we’re talking about in this series and we’re going to talk about some more of it, particularly in the next one, next episode. But there’s this framework. And so again, the framework investing or insurance. Guarantees, as I like to say, are fine. They’re great. Who wouldn’t want a guarantee, but they tend to be pretty expensive. So the choices you already have some guaranteed income from pension and Social Security. Do you want to buy more? And where that’s going to lead us in today’s episode is really talking about if you are going to go down the path of an investing-based framework there are certain things that need to be dynamic about that approach. Or ideally, it should be. And that’s really where we’re going to do Walter.

Walter Storholt:                13:41                     So dynamic is the word of the day if you will. That is the direction that we’re going into today. I think most people, if you just said the word dynamic, Kevin would have a positive correlation with that word. Dynamic usually means, you know, it’s a very good thing that we’re flexible. We have the ability to, you know, approach a situation from perhaps multiple angles. We can adapt to the changing environment. Dynamic is a good thing, I’m going to assume that it is also in the context of our discussion today when we talk about putting together a proper plan and in particular this conversation about Retirement Income Planning. So part four, talking about a dynamic strategy, why your income strategy needs to be that way. Set the stage for us of you know, why this is an important tenant to this conversation.

Kevin Kroskey:                  14:31                     So we need to be dynamic because things change, life happens and specifically as it relates to retirement income in three ways. And so these are the three things that we’re going to outline today. Dynamic market expectations. We need to have a dynamic allocation or recipe for our investment portfolio. And then our spending is as well. So we’re going to talk about those three things. I’ll just take them in that order. So when we talk about market expectations, it’s certainly easy enough to go back and look and see what the market has done in the past. You know, you can go to Morningstar or whatever online platform you prefer. You can look up returns for the market, for stocks, for funds, you name it. The internet has brought a ton of information readily accessible at our fingertips, but it hasn’t necessarily brought a lot of clarity for people because the information can sometimes be a little bit overwhelming.

Kevin Kroskey:                  15:27                     But when we go back and if we look just very simplistically stocks, talk about, you know, basically US large stocks, S&P 500 or bonds, you know, we have data going back to the 1920s for, for the S&P 500 and I’ll just use a five-year US government notes. So you know, notes are bonds, two ways of saying kind of the same thing. But when you look at those returns going back nearly a hundred years at this point, you see stocks, US stocks returned about 10% and bonds returned about 5% so that sounds good, you know. So should we use that as a starting point to go ahead and make our forward-looking projections? Because anytime you go ahead and do the planning that we already presupposed that you’ve done, you have to go ahead and put some assumption for your stock and bond returns in there.

Kevin Kroskey:                  16:18                     So you’re putting something in there. You better be putting something that’s reasonable and the question that I’m asking is history reasonable? Maybe, maybe not. So when you look at, say the last 10 years, so we talked about the last, I’m just going to round it up and call it 100 years, we have 10% and 5%. So the last 10 years as of the end of 2018 so US stocks did about 13% so certainly higher than the historical, 100 year average of about 10% whereas bonds only did about 2% so Walter, we have a longer period of history of 10% and 5% for stocks and bonds, or we have the last 10 years of 13% and 2% which one should we use?

Walter Storholt:                17:06                     I would think you would take the longer period, right? More data should be theoretically more accurate.

Kevin Kroskey:                  17:11                     Yeah, it was a bit of a trick question and I apologize.

Walter Storholt:                17:15                     I’m willing to fall on the sword.

Kevin Kroskey:                  17:17                     All right. So for bonds, it’s relatively easy and it’s really whatever the current yield is. So if we look at what the yield is today on those five-year US government bonds, it’s about 2.5%. So it’s a little bit better than the last 10 years than the 2% that was there more recently, interest rates did start moving up, although over at least over the last few months, they’ve come down a fair amount again. But what studies would show is if you look at the returns over the next 10 years, it’s going to be incredibly highly correlated to the starting yield is. So the starting yield is 2.5%. If we’re looking at return say for the next 10 years, which may not be completely representative of a 30-year timeframe that we’re planning for somebody that’s on the doorstep of retirement, but it’s a good starting point.

Kevin Kroskey:                  18:04                     So, we’re looking at 2.5% there. Now we could say, well, you know, do interest rates become more quote, unquote normalized to what they were in history and you know, frankly your guess or anybody’s guess as good as mine at this point. We do have some good evidence for other countries that are a little bit older than us in the US demographically, Japan is a good example where the culture and the people, the average age, they’re older and the US is kind of going that way. You know, we don’t have as many young people being born today. We don’t have as much kind of net immigration coming in that we did see a generation or two ago and the older demography for our population does have some impact on spending and how are our markets are changing. It’s a little bit of a rabbit hole that we’re not going to go down beyond just mentioning it.

Kevin Kroskey:                  18:52                     But nonetheless, you know, if we just used that 2.5% for bonds, I think that’s a reasonable starting point. So, it’s certainly a far cry from the 5% over the last hundred years. Now, if stocks, on the other hand, are certainly more difficult to go ahead and predict there’s some, if you can just go ahead and break up stock returns, you can do it into just a few factors. One is inflation. So, there’s always some inflation that’s kind of embedded in there, if you will. Stocks also, at least some of them pay dividends and that tends to be fairly stable. The dividend yield right now for the S&P 500 is about 2% it hasn’t changed much for quite some time now. Probably for the last 20 years or so, it’s been right around about 2% with a couple of different spikes and most notably down in the bear market in 2008 so inflation tends to be pretty consistent.

Kevin Kroskey:                  19:42                     Dividend yield tends to be pretty consistent. What I’ll call earnings growth does tend to, we talked about a wiggle factor in a prior episode. I’ll use that again here. They do tend to kind of jump around a little bit more and then also just whenever somebody is willing to pay for a dollar of those earnings tends to jump around a lot. So, we have kind of four components. We have inflation, we have the yield of the stocks or the dividend yield, and then we have whatever the earnings growth is after inflation. That tends to jump around a fair amount over time. And then we also have this kind of valuation component is really what we call it, but it’s like how much is somebody willing to pay for a dollar of those earnings that the stocks are kicking off. Right now, they’re willing to pay a lot for those earnings back in the bottom of 2008 when the market went down a lot, they were not willing to pay much at all and so that’s a good example of how that can just kind of swing around but we can just go ahead and kind of decompose those returns for stocks and just get a guidance.

Kevin Kroskey:                  20:41                 There are other ways to do this kind of forward-looking estimates. Again, in a prior episode, we talked about an article, a Morningstar article that Christine Benz had written. Where she actually surveyed some of these forward-looking expectations from a lot of the big investment houses that are out there and make that kind of research public. But when you’re coming off a 10-year period like we just have and the stocks bounce back from 2008 and delivered 13% annualized compounded returns, that’s certainly pretty aggressive to assume that’s going to keep going. You know, people that bought at those prices in 2008 bought low and they certainly have gotten a lot higher over the last 10 years and over time, you know the stock market kind of overshoots and undershoots, but really those earnings of the companies kickoff really do drive the value that we receive as investors.

Kevin Kroskey:                  21:30                     So when you go back and say, well is it 10 years, is it 100 years or 20 years? Certainly having a long time period is beneficial. But I would argue that if you go back a hundred years, the 1920s or the 100 years technically, the 1910s, I suppose, the market economy is really different than what it was today. You know the US was becoming a world superpower. We are that superpower. We’re a lot more mature, our economy tends to be a lot more stable. The banking system is different. So while going back pretty far in time has some value. It also has some limitations. So if you follow those four different variables that I talked about and using some different math to go ahead and project what expectations are, is really how we go ahead and you know, use the inputs and derive the inputs to put into our client’s financial plans to make these forward looking assumptions and all of those, if anybody wants to go back on some more detail on this, would link to the prior show notes for the Morningstar article that I mentioned.

Kevin Kroskey:                  22:34                     So you can actually see some of these numbers, but every single one of them from the likes of JP Morgan, BlackRock, Vanguard, GMO, you name it, not a single one of them are projecting the US stock market returns over the next 10 years are going to be 10%. They’re all single digits. So they’re all saying that they’re going to be less for some of those reasons that I just commented on and plenty of others as well. But I’ll just put a little button on this and Walter being a former sportscaster, maybe, correct me if I’m wrong, but there was a famous quote attributed to Wayne Gretzky and maybe said it maybe he didn’t, but you know, regardless, I think it’s very telling in a lot of cases you want to skate to where the puck is going to be, not where it’s been and you need to do the same sort of thing when you’re looking forward into the future, into this uncertain future, making planning assumptions, making investing decisions and trying to use some, a reasonable guideposts about where returns are likely to end up over the coming 10, 20 or 30 years where past performance certainly may not be indicative of future results. As all the disclaimers say in the ads.

Walter Storholt:                23:43                     Yeah, I was just about to say the thing about the disclaimers

Walter Storholt:                23:46                     About that exact statement of past performance doesn’t indicate future results or whatever the exact verbiage is that they tend to use, but you still use past performance as a tool so you don’t necessarily throw it out with the bathwater. You’re still keeping it as part of the conversation in the analysis, but thus the need to be dynamic in that conversation. You can’t just say, yeah, history says this. That’s how we’ll take it. You’ve got to put it into the broader context. And so I think that’s wise thinking and I don’t know if Gretzky was the one who, you know, officially said that he might have. Certainly, it sounds like something he’d say, but whoever said it, certainly wise guidance there, skate to the where the puck will be, not where it was. That makes a lot of sense as well. All right, well you mentioned there were three different dynamic conversations that need to take place here. That’s the dynamic market expectations portion of our conversation. What about the dynamic allocation side of things?

Kevin Kroskey:                  24:39                     Yeah, I think this one is pretty intuitive. So if we all agree that the market returns change and you know, we just did the last 10 years for the S&P 500 was a 13% annualized compounded return. You know, if you go back to say from 2000 through those 10 years, the S&P 500 actually had a negative return over the entire 10 years. So you know, you can drive a truck through those two differences there. So obviously the market returns change, therefore your market return expectations probably should also change in part based on what the market has recently done. But then if that’s true, then obviously your investment allocation or the recipe that you’re using to combine, you know, the proportion of stocks and bonds, real estate and what have you in the portfolio should also change. So said another way, you know, after 2008 and stocks went down a lot and got a lot cheaper, they certainly could have gotten worse.

Kevin Kroskey:                  25:36                     In fact, they did in early 2009 they didn’t turn around until nearly the middle of March in 2009. But as you were going through that and they were down saying like 40% at a certain point in time while they’d already gone down 40% now they certainly could’ve gotten down another 40%. But if you just had that rebalancing approach and we’re buying more stocks and selling the bonds that had done well then whenever it did bounce back, then you, you’re going to be okay, but you are never going to get the timing right. So you always got to keep that in mind. So as the expectations change, your allocation or your recipe needs to change, not only in terms of the expectations but also in terms of what your plan results say. You know, you may be going into retirement and looking and say, Hey, I’ve done well, I’m able to retire at 58 and you know what, I just had a meeting with a client a week and a half ago on the same thing.

Kevin Kroskey:                  26:29                     And they’re retiring in their early sixties but they have pensions that are going to kick in at 65 they could take them sooner, but there’s actually a pretty big reduction if they do and they just have to wait. And so they’re going to wait for their pension income because it’s going to be appreciably higher in a few years. They’re going to wait on a Social Security benefits because they’re going to, you know, reap the benefit of deferring that as well. And even though they got a lot socked away and they say, Oh Hey, where’s my money going to come from? Well I know they know where it’s going to come from. It’s going to come from what they accumulated, right? However, you know, depending on what your plan results show, and kind of that stress tested we started with earlier, it’s going to dictate whether you can afford to take a lot of risk at that point.

Kevin Kroskey:                  27:11                     And for these clients, they were fortunately in a position in an envious position where you know, even though they were not going to have any income from pension or Social Security for a few years and in some instances you know quite more than a few years, they could go ahead and be very aggressive, you know, of course in a diversified imprudent fashion or very conservative, they just had done a good job on their planning and you know, were living below their means. That’s not always the case. And certainly isn’t the case for many people. So whenever you have a 2008 and the markets go down a lot and this big negative bad timing event happens and you’re doing that stress test and you’ve done that stress test, you can get through that okay. You know, you’re not taking so much risk that you’re going to have to cut back in certain areas of your life that are more needs based rather than items that are more discretionary.

Kevin Kroskey:                  28:02                     So if you’re taking a lot of risks and a lot of stock risk and your plan isn’t so well funded that you had the luxury of being very aggressive or very conservative, but you really have a certain limit to the amount of risk that you can prudently accept and still manage through one of these bad timing events. You need to know that and you need to know that going in. And if your allocation not only needs to be dynamic in light of expectations but also needs to be dynamic in light of what your planned stress test has shown. So, we have the dynamic expectations. Therefore, we also have a dynamic allocation, not only due to the expectations but also based on whatever the stress tests of our plan result show. And then also related to that is dynamic spending. You know, you’re going to have some expenses that, as I just mentioned, are more needs based.

Kevin Kroskey:                  28:57                     I always say, you know, heat in the house, food in the belly. Although if I’ve been told if you live in Florida year-round, it’s not heating the house, it’s AC in the house. So, I guess depending on where your geography is, but all those things that are essential to you, you’re going to need to go ahead and make sure that you meet. You’re going to need to pay your property taxes. Your insurances certainly, your health insurance that’s in the needs bucket, but you know if you’re spending, you know, $10,000 or $15,000 a year on travel, well I would say that that’s probably not a need for most people. That is certainly a nice luxury to have and it may be more important to some than others, but if you had to cut back, you would certainly cut back at the travel rather than in those other needs-based categories.

Kevin Kroskey:                  29:38                     So you’re spending, depending on what the actual results of the market environment may be, also needs to be dynamic. You need to have that prioritization of your spending needs and those three things, your market expectations, whatever you’re plugging into, your plan projections, your allocation, your investment allocation in the investment recipe you’re following as well as your spending. Particularly if things go bad, you need to have a predetermined plan where you’re going to cut back if you need to. And we’ve been doing this for more than 10 years now and we did it going through 2008 and into 2009 but we try to make this as clear and concrete as possible for people. And we had a client recently, and we may have even mentioned them on a prior podcast episode, but they were debating whether they can do a second home in Florida and they have a beautiful home in Northeast Ohio.

Kevin Kroskey:                  30:31                     At some point they’re likely to downsize because they have a fair amount of land and upkeep with it. And they were just saying, you know, we really like going down and visiting our friends and family in Florida. Can we go ahead and do the second home? And it wasn’t in the plan, to begin with. We had some travel down there, but this was a much bigger financial commitment. And so when we looked at it, we said, you know, guys, we understand that you want to do this. We understand that this wasn’t necessarily something that was planned for before you made the retirement decision about a year and a half ago. But as long as you are willing to commit to downsizing, you know, your big Northeast Ohio house at some point, it doesn’t have to be right away, but at some point and freeing up some of the money that’s in the equity in the house and can then be available for spending as long as you’re willing to do that.

Kevin Kroskey:                  31:17                     And even if things get bad in the market, if returns are lower than what we would expect or what have you, you know, you may have to kind of cut back that second home, you know, rather than take it all the way out into your eighties you know, you may only be able to keep it for 10 or 12 years because what we don’t want to have to happen is you keep spending on those other discretionary items and then it causes some, you know, long-term concern about you being able to meet your, your more needs based spending. So we tried to make that trade off very clear to them. And we did and we are going to have a follow-up meeting here in another month and after they’ve kind of chewed on it for a while and see where their thinking lies. But that’s a good example where the spending may need to be dynamic and may not.

Kevin Kroskey:                  31:57                     You know if returns are good and we have a good series of returns and maybe even spending in some other areas may be lower than what we’re currently projecting, then it may be a conversation we never have to have but it would be malpractice, in my opinion, not to have a predetermined plan because the worst thing that you can do is follow this probability based approach. A probability-based approach that we will outline in the next episode, historically, is going to be the pants off, more of an insurance-based approach as we will outline. But if you’re going to do it, you need to do it right and things change. Life happens. We need to have a dynamic approach and then we also need to have this predetermined plan so when things do get bad because it’s going to happen, markets go up and they go down at least temporarily, but you have to have a predetermined plan about, Hey, what does this actually mean to me and to my lifestyle and do I need to change something now? Or does it mean that I, maybe I just need to kind of cut back from something that I was planning on doing into my  eighties, I’m okay and I’ll have to make that trade off where I may only be able to do it into my early seventies

Walter Storholt:                33:00                     All good parts of the conversation for sure. As we talk about spending allocation and of course dynamic market expectation as well, we’ve got to make sure that we are flexible when it comes to all those different facets of the portfolio and of the plan. If we’re not, if you don’t have a flexible plan, something that’s dynamic that can adjust to the changes of the financial landscape around us, then it might not be the best plan. You can possibly have and that should be a red flag and a reason to pick up the phone, give Kevin and his team a call. If you’ve got questions about something we talked about on today’s show, you can reach out by calling (855)-TWD-PLAN that’s (855) 893-7526 or always online as well at TrueWealthDesign.com that’s TrueWealthDesign.com well Kevin, you’ve set the stage for our final episode in the series here on Retirement Income Planning and I think it’ll be a good one because I was going to counter with you to kind of play devil’s advocate here a little bit of, you know, somebody doesn’t want to necessarily hear that they’re going to have to have dynamic spending in retirement.

Walter Storholt:                34:06                     That’s not necessarily music to somebody’s ears at first blush. And I think that’s why so many people are attracted to that word guaranteed. Give me something guaranteed and predictable and I’m looking forward to hearing that conversation on our next podcast should be fun.

Kevin Kroskey:                  34:21                     Yeah, absolutely. And I guess the thing that I will leave everybody with is, well, you may not want to have something that’s dynamic, but if you go with the guarantee, you’re going to have to lower your spending. So that’s the tradeoff that we’re going to dig into in the next episode.

Walter Storholt:                34:36                     That should be a fun conversation. That’ll be next time around, right back here on Retire Smarter. Join us for the final episode in our Retirement Income Planning series for Kevin Kroskey, I’m Walter Storeholt. We’ll talk to you next time on Retire Smarter.

Disclaimer:                          34:54                     Information provided is for informational purposes only and does not constitute investment, tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance referenced is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.