Where to spend money before you retire
Show notes:
This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…
Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…
He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…
And now… here’s Mike…
Hello... and welcome...
If you’re still working... but planning on retiring in the next few years... there are some special places you should think about putting some money while there’s still time...
In today’s episode... I’m going to give you some ideas... and you’re going to want to jot these down...
And while you’re grabbing something to write with... let me remind you of where you can get some other useful ideas when it comes to planning for retirement...
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Okay... I’m thinking about one of the very first clients I ever worked with... this is many, many years ago...
He was planning to retire... and he came to me for help...
He wanted to know if he had saved enough money... and if so... how he should invest that money so it would last for the rest of his life...
So I put together a plan for him... and it showed that based on what he planned to spend every year... and the way we planned to invest his life’s savings...
...that he was likely to be just fine...
So off we went... he retired... rolled over his 401-k plan into an IRA... and started making monthly withdrawals... right on schedule... just like we planned...
But imagine my surprise just a few months later... when this fellow called me and said he wanted to withdraw... nearly half of his life’s savings...
Why... I wondered... so I asked him... have you found a different financial advisor? Are you going to invest somewhere else?
No, of course not... was his reply... you’re doing a great job...
But I love speedboats... I race them on weekends...
I’ve always dreamed of having one of my own... so I’m going to build one with a friend of mine... from scratch...
And let me guess... I said... building a custom speedboat from scratch costs a lot of money...
Oh, you bet... he said...
Despite begging with this man not to blow nearly half of his nest egg on a retirement hobby...
Despite my warnings that this would completely wreck his retirement plan... and it would likely be impossible to recover...
He did it anyway... and suffice it to say... the story doesn’t end well...
Not only did I politely ask him to find another financial advisor... he also had to go back to work...
And I never did hear what happened with the boat...
Now, that’s a very extreme example of a very common problem among new retirees... I see it all the time...
People stop working... they’ve got all this money... and all this free time... and sometimes they start spending big chunks of it...
They’ll pay off their mortgage... whether it makes economic sense or not... or they’ll add a room... or buy the lot next-door...
They’ll splurge on a new car... or a boat... a vacation home... an expensive vacation...
There’s nothing wrong with doing the things you’ve dreamed about doing when you retire... and of course... those things often cost a lot of money...
As long as you’ve made a plan for those big expenses... as long as they’re not likely to wreck the retirement plan you and your financial advisor have put together...
The problem comes when you make those big splurges... and pretending you’ve just won the lottery... kidding yourself into thinking it’s not going to impact what the rest of your life is going to look like...
Sure... you DO only live once... but you don’t want to run out of money in the process...
What I want to focus on today... is what you should be doing with your money... in whatever time you have left... BEFORE you retire...
Let’s think about some things you should pay for... some places to put money while you’re still getting a paycheck... BEFORE you stop working and getting that paycheck...
If you do it right... you’re going to be getting a great head-start on retirement... and that’ll be a great feeling...
But doing these things in the year or so leading up to your retirement could also... help you avoid the urge to overspend right AFTER you retire...
If you’ve got a few years left before you retire... that’s certainly good news... because you may be able to get everything on my list done in time...
But if what if you’ve only got a few months left? What if retirement is almost here?
Well, don’t worry about it... and maybe don’t even consider delaying retirement if you haven’t done all these things...
Assuming, of course... that you’ve got a plan in place... and you’re pretty sure you can financially AFFORD to retire...
So I’m listing these spending projects in order...
If time is short... get the first few done and work on the rest after you retire...
Okay, ready?
The very FIRST thing I would do with the time you have left... is to start setting aside some cash to live on during the first year of retirement...
I call this your Reserve...
It’s a year’s worth of cash... or cash equivalents...
Your paycheck is going to stop when you retire... and this reserve of cash is what you’ll be living off of... for the coming 12-months...
And when I say cash... I don’t mean stocks... or even bonds... I mean secure... liquid assets you can get your hands on...
If you’re able to earn some interest on it as you make your withdrawals... that’s gravy...
Now... you don’t need to keep all this money sitting in a checking account...
It might be the cash portion of your long-term investment plan...
But I would say... at least on the day you retire... make sure you have at least three months’ worth of expenses someplace you can get your hands on it... same day...
If you’re setting up a bank account for your spending needs... you might also want to set up direct deposit for any income you’ll be receiving when you retire... your Social Security benefits, for example... or a pension...
That’ll be part of your monthly spending as well...
And if you don’t have a year’s worth of spending in the bank already... and most people probably don’t... then save as much of your paycheck as you can afford while you still have one...
And if you’ve been reinvesting dividends in your taxable investment accounts... maybe use this cash flow to build up your cash reserve instead...
Okay... there’s Step One... set aside a cash reserve for Year One of retirement...
Step two... is to take a look at your debt...
A lot of people feel like they’ve got to pay off their mortgage before they can retire...
That’s a nice goal... but I certainly wouldn’t take a big chunk of your retirement investments... which might be earning more than the interest rate you’re paying on the mortgage... just to be debt-free when you retire... especially if you’d have to pay income taxes on whatever you take out...
If you’ve only got a few payments left... sure... go ahead and pay off the mortgage... but you don’t need to make this a priority... especially if you have other debts...
Now credit cards? Much different story...
My advice is to do whatever it takes to pay off all your credit cards before you even think about retiring...
Why? You know why...
Because the average interest rate on credit cards is around 27-percent... and you can’t afford to pay that interest... especially after you’re retired...
Stop going out to eat... stop taking vacations... stop putting money in your 401-k plan for a while if you have to...
Just make sure those credit card balances are ZERO by the time you retire...
And then make sure you can pay them off... every month... from then on...
Once your credit card debt is extinguished... move on to other non-mortgage debts that charge you interest every month...
Student debt... personal loans... and so on...
Step three... your health...
I’m assuming you know how important it is to make sure you’ve got a plan for paying for healthcare...
You understand how Medicare works... and you know to put extra money in your retirement budget to pay for what Medicare doesn’t cover...
But are there things you want to have done... that your current health insurance will pay for? Things you could get done while you’re still working... and still covered?
A complete physical for starters...
Any diagnostic tests your doctor recommends...
Elective surgeries and other procedures you might be putting off...
Try to get those things done while you’re still on the job...
Have you been putting money into an H-S-A... or health savings account? Now’s the time to step up your deposits...
Try to maximize your H-S-A contributions while you’re still working...
You’ll be able to use that money to pay for healthcare expenses after you retire...
And you’ll get some tax advantages along the way...
Step four... home repairs and improvements...
First thing everyone wants to do when they retire... get their house in order... literally...
New paint... new carpet... new wood floors... new furniture... new kitchen and bathrooms...
Well, those are all great ideas... I mean... you’re probably going to be spending more time at home once you’re retired... you may as well make it a nice place to live...
But you’ll be even happier if you tackle home improvement projects while you’re still working... especially if they cost a lot of money...
Clean out the garage? Spruce up your landscaping? Fine... wait until you retire and get bored for those projects...
But something major... like remodeling... try to get it done while you’re still working...
And if you can’t... then schedule it into your future spending... put it in your financial plan... spread those costs over the first few years of retirement so you don’t tear a big hole in your nest egg before you even get started...
And one last idea when it comes to your home...
If you don’t have a home equity loan... or a home equity line of credit... it’s better to get one in place while you’re still working...
Lenders want to see what your income looks like... and that’s a lot easier to do when you’ve got a regular paycheck coming in...
You don’t want to tap that line of credit if you can avoid it... but it’s a good source of emergency cash if you ever need it...
Step five... your car...
If your car is on its last legs... if ready for a trade-in and you’re still working... do it while you’ve still got a paycheck...
Pay cash if you can, of course... and if you borrow to pay for a new car... again, just like home improvements... make sure that car payment fits into your retirement spending plan...
And if you’re keeping the car you’re currently driving... spend whatever you have to... while you’re working... to get it in good shape...
New tires... expensive repairs... get those done before you retire so you don’t have to worry about those expenses for a while...
And if you’ve got a car payment now... and you plan to keep the car after you retire... consider trying to pay it off... especially if you weren’t lucky enough to get one of those zero-point-whatever finance plans...
Not your first spending priority before retiring... but if you can... that’s one more bill you don’t have to pay when you’re busy enjoying yourself...
And ask any retiree... the fewer bills you have to think about... the more enjoyable retirement gets...
And Step 6... speaking of enjoying yourself... one of the first things people like to do to celebrate the end of a successful career... is take a big trip...
And who can blame you? I think it’s a great idea...
Take a river cruise down the Danube... a train trip across the Rockies... watch the leaves change in New England... visit the national parks... spend some time on the coast in the middle of winter when your working friends back home are scraping their windshields...
And you know what’s even better than planning a big trip to celebrate retirement?
It’s having it all paid for before you go!
If you know when you’re going to retire... sit down and plan a big trip sometime within the next 12-months...
And then start squirreling away money from your paycheck into a special, separate account... just for that trip...
All right... let’s review...
6 things to consider paying for... 6 places to put money... while you’re still working and earning a paycheck...
And these are in order of priority... do as many as you can... but I recommend doing them in this order:
One... set aside your first-year cash reserve... make sure you’ve got enough money set aside to cover your expenses during the first 12-months of retirement... we don’t want to start off with any surprises... and keep your reserve someplace secure and liquid... even if you don’t earn much interest on it...
Two... get rid of as much debt as you can... especially credit cards and other non-mortgage debts...
Divert some of your paycheck income into getting these debts paid off before you retire... even if you have to tighten your belt to do it...
Better to tighten your belt now than having to do it after you retire...
Three... healthcare...
Any health issues you need to take care of... that your employer’s health insurance will cover... get it taken care of while you’re still on the plan...
And fully fund your health savings account if you have one...
Number four... your home...
Don’t wait until you’re retired to make big, expensive home repairs and renovations...
Get it done before you retire and those paychecks stop coming in...
And consider applying for a home equity line of credit while you still have regular employment income...
Five... your car...
If you need a new car... better to buy it before you stop working... pay cash if you can...
And if you plan to keep your car... get those new tires and expensive repair jobs done and paid for while you’re still earning a salary...
And finally... step six... the fun stuff...
Plan a big trip... or a big celebration... while you’re still working...
And set aside all the money for it... before you retire...
That way... when retirement comes and all your bills are paid... you can go have some fun!
You deserve it...
Thank you for spending some time with me today... I hope I’ve given you some good ideas to think about…
As I say on the radio... we’re happy to be... at your service...
Take care.. and we’ll talk again soon...
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Past performance is not indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
