One of the trickiest aspects of retirement planning is anticipating how spending might change and establishing a system for taking withdrawals. On a recent episode of The Long View podcast, Fritz Gilbert, an author and retirement blogger at The Retirement Manifesto, shared how he approached those jobs in the years leading up to his retirement at age 55.
Jeff Ptak: You said that the most popular article ever on The Retirement Manifesto site is called "20 Steps to Take in the Year Before Retirement." One of those steps is to create an in-retirement budget and then to try living on it. Can you walk us through that process?
Gilbert: That "20 Steps to Take in the Year Before Retirement" has gotten a lot of comments. It's an interesting post. Retirement ultimately is a math problem. And you can't solve a math problem without numbers in it, right? You've got to put some numbers to it. And what we did, we've never tracked our spending, we've always saved a certain percent, increased that every year, and lived on the balance. But we knew we couldn't be that informal in retirement. So, we actually tracked every penny we spent for a year. We made it 11 months. We didn't do a full year--it's pretty onerous. But we knew it was important. So, we tracked every dime we spent. And we basically looked at, OK, here's what it is today, we know what it is today, it's grounded, it's solid, it's fact. How do we think that's going to change in retirement? So, you change those things that are going to increase. Healthcare expenses. You know you're not going to be commuting anymore, you're not going to be buying clothes for work, you're not going to be buying lunch in the office, whatever. Make the adjustments. You're not going to be saving anymore. So, you can take the savings and take those off, and make a before and after retirement budget. We were conservative in almost all of our assumptions. But be conservative and build a solid estimate as you can, because all the math is driven by what your expected expenses are going to be, and you've got to get that as accurate as you can. So, that's the most important thing.
It's basically putting yourself in the mindset of living on an allocated budget and making sure your assumptions are reasonable and recognizing the importance of getting that part right. The nonfinancial aspects are important, obviously, but you've got to get the financial piece right. It's necessary. And this is, to me, the most important thing that most people overlook, "Oh, I'll use the 80% rule. I'll be fine." No, don't do that. Are you going to pay off your house? Are you going to relocate? Are you going to downsize? We modeled all that stuff. And because of it, we know that we're comfortable with a very conservative, safe withdrawal rate. And we really don't have a lot of financial concerns because everything that we're spending is pretty much in line or slightly below what we had planned when we were making the decision.
Christine Benz: Well, I want to ask about how you approached withdrawal rates. But before we get into all that, I wanted to talk about this one-off expense reserve account that you've written about. It's kind of an emergency fund for retirement. Can you talk about how you decided how much to hold in it?
Gilbert: Yeah. I give all the credit to The Wall Street Journal Complete Retirement Guidebook. It's on my bookcase. And that's where I got the concept. What I call it is the "expected unexpected expenses," right? You're going to have unexpected expenses, but you should expect that. You're going to have to replace your roof every 15 years. You're going to have to get new air conditioner every 20 years, right? You're going to have to replace your car every however many years. So, what we did based on this book is, if you look at a car--let's just do easy math. Let's say it's $12,000, and you got to replace it every 10 years. So, it's $1,200 bucks a year. So, it's 100 bucks a month. And if you basically go through all of those things that you know are going to need to be replaced--and it really primarily focuses on the maintenance emergencies, maybe a health issue you could throw in there as well. But in our case, it came out to $12,000 a year. Now, you're not going to spend $12,000 every year, you're only going to buy that car every five years. But if you set aside $12,000 in January of every year, and then if you've got a repair, you can pull it from that fund. The next January, you put another $12,000 in there, the next January, you put another $12,000 in there. And basically, over time, that should give us a buffer when we need to replace the car, unless it's right away in the first year of retirement, obviously. But over time, the money that we've set aside every January should be sufficient to cover all of those unexpected expected expenses. And we do that first. So, we take the $12,000, we put it in there, we count that in our withdrawal rate, because it's money that we know we're going to spend, we just don't know when we're going to spend it. And then, we set up our monthly paycheck, if you will, with the balance of the amount of money we can take out each year.
Benz: I'd love to hear your thoughts on how you set your withdrawal rate. And I think we could probably do this whole interview on that topic because it's so huge. But can you talk about how you arrived at what you consider to be a sustainable withdrawal rate for yourself?
Gilbert: Everybody knows the 4% safe withdrawal rate based on the Trinity study and all that, and then you've seen a lot of the stuff that's come out since. So, that's a little bit aggressive. Karsten Jeske wrote a huge safe withdrawal series, 40-some articles now, and his number was like 3.25%. I'm like, hey, he's smarter than I am. He's saying 3.25%. Let's shoot for about 3.25%. So, really, knowing the 4% is generally OK, I'm more conservative and the markets seem a little bit inflated, let's take a more conservative approach and target between 3.0% and 3.5%. And like I said, every year-end I look at the net worth and I kind of set up the amount that we could take based on 3.0%, 3.5% and 4.0%, and right now, we've been probably below 3.0%. The market has been great, and I've had some unexpected income from my book, and so on. So, I think plan conservatively, and in our case, I worked one more year. The numbers said I could have gotten out at age 54, but I would have been closer to that 4% withdrawal rate, and I was like, you know what, for the peace of mind for the rest of our lives to have a little bit of a cushion in the numbers, being a conservative investor it was worth it in our case, and we've kind of targeted now the lower end of the range.