September 25, 2020

Podcast: Steve Vernon — Don’t Go Broke In Retirement

Podcast: Steve Vernon -- Don’t Go Broke In Retirement

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Podcast: Steve Vernon -- Don’t Go Broke In Retirement Episode 47 of the NewRetirement podcast is an interview with Steve Vernon — a writer and research scholar at the Stanford Center of Longevity — and discusses the Spend Safely in Retirement Strategy that Vernon came up with and, secondly, his new book, Don’t Go Broke in Retirement.

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Steve Chen: Welcome to The NewRetirement Podcast, today we’re going to be talking with Steve Vernon, a writer and research scholar at the Stanford Center of Longevity. He’s a former consulting actuary at Watson Wyatt Worldwide, and he’s also worked at Mercer, and he also works closely with the Society of Actuaries. We’re going to be talking about two main topics. The first is the Spend Safely in Retirement Strategy that he came up with. And, secondly, his new book Don’t Go Broke in Retirement.

Steve Chen: So, with that, Steve, welcome to our show. It’s great to have you join us.

Steve Vernon: Hello, Steve. Thanks for asking me to speak and I hope we can help your listeners.

Steve Chen: Yeah. No, I appreciate your time. So we’d just love to hear why you wrote this book and who the main target audience is.

Steve Vernon: Well, Steve, the main target audience are older workers. People in their 50’s and early 60’s, or even retiring. So, pre-retirees and retirees who are approaching their retirement years and they’re wondering when should they retire, and how should they deploy their savings in retirement. Maybe they don’t work with a financial adviser because they don’t have millions of dollars. And maybe, if they were in a prior generation, they might have had a pension plan. But now they just have a 401K balance and social security. So what do they do?

Steve Vernon: And I’m really trying to address that audience. And it’s really–it’s people who have under a million dollars in savings, which is just about everybody. But I’m trying to get at those middle income people who are approaching retirement and just wondering how the heck are they going to retire.

Steve Chen: Yeah. What are some of the big questions that … or the most common questions that you hear from those folks as they approach retirement?

Steve Vernon: Well, I’ll talk about common questions, but I also want to talk about the questions they should be asking. Because a lot of times I hear, “What should I be investing in as I approach retirement?” And, yes, investing is important, but a lot of people confuse investing advice with planning advice. And I have a list of the top retirement decisions that people should make, and only one of them involves investing.

Steve Vernon: Let me go through that list, if that’s okay. The first one is when and how to retire. By when it’s, like, when do you pull the plug and retire? And that has a tremendous influence on your ultimate retirement income. But by how to retire is, are you going to work part time for a while? Which a lot of people say they want to do, or are they just going to quit cold turkey and not work for income at all? So that’s the number one decision. Doesn’t involve investing.

Steve Vernon: Closely followed by the number two decision is when to start social security. Because, for the target audience, people with under a million dollars in savings, social security is going to be delivering 2/3, 3/4 of your total retirement income. And so you need to maximize that. And, again, that’s nothing to do with investing. It’s all about when to take social security.

Steve Vernon: Only the third step, which is deploying your savings to generate income to supplement social security, that step involves investing. And so that’s the third step is how do you deploy your savings? Do you invest it and draw it down, or do you buy an annuity, or maybe a little bit of each? Or do you use your savings to fund a social security bridge payment, which we can talk about. But that’s the third step.

Steve Vernon: The fourth step is making smart choices for Medicare and medical insurance. And then the fifth step is which living expenses are you going to reduce? Because the vast majority of people are going to be retiring on income that’s lower than what they were enjoying while they were working.

Steve Vernon: So those are the top five steps that have the most impact on retirees and only one involves investing. And yet, I hear so many people say, “What should I be investing in?”

Steve Chen: Yep. Right. Well, it’s probably thanks to the financial services industry which is very focused on having people accumulate lots of money, since that’s how they’re paid, essentially. That they make their money on a percent of assets. Well, I’d love to talk about the first of those steps. A lot of folks, I think, I saw some data … people think that they’re going to work into their 60’s, but the actual average retirement age is late 50’s for many folks. They might get downsized, laid off, or there’s ageism. Do you have data around when people typically stop working and whether or not they continue working part time or are able to?

Steve Vernon: Well, we have some data. Basically, what we’re seeing is that more and more people want to work longer, as you correctly identified. The average reported age, however, that they actually retire at has plateaued and has remained stuck at 62 or 63. What we don’t know is, for those people who report themselves as retired, are they still doing gig work, or part time jobs? And we do have evidence that, yes, that’s happening.

Steve Vernon: Now, the pandemic is making this harder than ever. So when I say it’s better off if you can delay retirement or at least work part time, I have to acknowledge in the next breath, it’s harder to do that now. And that’s just the reality that some people are facing.

Steve Chen: Yeah. For sure. And how about social security? So 2/3 to 3/4 of total income for people with less savings. That’s a huge dependency on this one source of income. What are the best practices that you recommend for social security?

Steve Vernon: Well, for the majority of people the best practice is to delay social security as long as you can, but no later than age 70. And that’s for most people. And I acknowledge not everybody wants to delay until 70, but if you’re in your early 60’s, even if you delay it until 66 or 67 you still have a big advantage. So I like to just say, “Delay it as long as you can or you feel like you can.”

Steve Vernon: Now that’s the advice for either a single home worker or the primary wage earner of a married couple. And the advice for a married couple where both of them are working becomes a lot more complex, because there are a lot of different possibilities. And that’s where you really want to find some social security optimizer program that you feed in your data and it just tells you what’s the best strategy that would work best for you. And so, I know it’s a long winded, but that’s the best practice in social security.

Steve Chen: We’ve definitely seen some data that people used to claim way too early, and it seems like they’re getting smarter and delaying it. Do you feel like people are a lot closer, in general, to claiming in a more optimal way? Or is it still, like, are they forced to take it early or people choose to take it earlier?

Steve Vernon: Well, up until the pandemic I was seeing evidence that the average age of planning social security was inching up year, after year, after year. And I like to think that people are listening to you, and I, and others, and that’s having an effect. It might have also been … we do see that social security claiming is influenced by the economy. And, so a lot of people claimed early during the last recession. I’m a little concerned it’s going to happen again now. But I think the word is getting out that delaying is a good idea and people are trying to figure out if they’re going to do that.

Steve Chen: Yep. Yeah. Do you worry or have concern that social security benefits will get cut in the future?

Steve Vernon: Well, that’s obviously a concern, because you read the headlines that says the social security trust fund is going to run out in 2034 or ’35. That was before the pandemic, now it might run out in 2029. And, so some people think they’re not going to get anything from social security, which is just wrong because the trust fund is only a supplemental source of funding social security. And most of the benefits, about 3/4 of them, are funded by the taxes that are collected by workers.

Steve Vernon: So in the worst case scenario, somewhere in 2029 to 2034, if the social security trust fund runs out and congress hasn’t acted to restore it then people would still get a 25 to 20 percent cut in their benefit. Now some people use that as justification as, “I better start that social security as soon as I can.” And I’ve done analyses that says that delaying social security is such a good deal that even if you delay and it gets cut back, it was still a smarter strategy than starting early.

Steve Vernon: When you think about it, delaying social security makes your monthly benefit bigger. I’d rather have a bigger benefit be cut than a smaller benefit be cut, because you’re not going to escape that cut by starting your benefits early. It’s still going to get cut, if you believe that. So I happen to believe that … I have to have faith in our politicians. They’re going to restore social security.

Steve Vernon: But, even if you’re so pessimistic, which that you think our leaders won’t restore it … and I understand pessimism, then delaying social security is still the right strategy. So if it comes to me, I’m going to figure out how to delay social security as long as I can, until I’m age 70.

Steve Chen: Great. Well, I hope to join you. In terms of the third step, deploying your savings … I know a lot of people talk about the four percent, there’s also you could potentially annuitize. What do you see folks doing to create income from their savings?

Steve Vernon: Well, there’s two questions. What we recommend people do and what we see folks doing. And what we see folks doing is, it’s hard to get good data on that. We really don’t know how people are investing and drawing down. It’s hard to get good administrative data on that. And we also know that the percentages of people who buy annuities is relatively low. So I’m going to say what we know people are doing, there’s just not a lot of good data out there.

Steve Vernon: Now, if it’s okay with you I want us to discuss at least what I think people should do, is build a portfolio of retirement income. And the first thing you should do with your savings is optimize social security. So if you aren’t going to work until you start social security, you don’t need to start social security then. And, so I’ve done analyses that show the very best use of your money, your savings, is to fund a social security bridge payment.

Steve Vernon: If I was to retire at age 65, for example, but you decide age 70 is the best age to start social security then you pay yourself from your savings five years worth of social security benefits. And that generates more income than any other way of deploying your savings. Investing, buying annuity, from a pure math perspective it’s a no brainer. It’s even a better use of your money if you believe social security will be cut. It’s still the best use of your money.

Steve Vernon: So I say to people, “Use a portion of your savings to optimize your social security benefits.” And then look at how much guaranteed income that’ll create, because you’ve got … think about social security. It doesn’t go down if the stock market goes down, it goes up for inflation, lasts the rest of your life, you don’t have to worry about outliving your benefits, it’s got survivor benefits, it’s got tax benefits because a portion of social security is in tax.

Steve Vernon: So optimize social security first, and then if you have enough guaranteed income you might be done. You could just invest and draw down the rest of your savings. But, some people might say, “No, I’d feel more comfortable if I have more guaranteed retirement income.” So then go search for a cost effective annuity. And I have to say that very clearly, because there are a lot of annuities out there that are really expensive. And then once you’ve developed enough guaranteed income so that you can sleep at night and ride out stock market declines, then you would invest and draw down the remainder. Our work suggests your IRS required minimum distribution works just fine. And you can put it on auto pilot because most IRA and 401K providers can do that for you.

Steve Vernon: But, yeah. You could do four percent, you could do three percent, our research says you could do either five or six percent. But there’s a big caveat. The best practice in investing and drawing down is to adjust your withdrawal amount to reflect whether your assets have earned money or lost money. And, so that’s not the classic four percent rule. That’s a modified four percent dynamic rule. So if you just have a percent of your assets that you’re taking down each year, our work says it could be three, four, or five percent, it just depends on how fast you want to draw down your savings. And do you want to preserve capital? Either for a legacy or to protect yourself against long term care expenses late in retirement.

Steve Vernon: So I know I’ve been rambling on, but that’s the key of what we’re advocating people do.

Steve Chen: Yeah. No, it’s great to hear. One of our users, and I’ll point people to this … Glen Nakamoto, he designed his own retirement paycheck. And, essentially, that’s what he did. He optimized social security by delaying it. Then he set up a bridging function to fund his RMD’s, which he used to pay … well, sorry. He optimized social security, then he bought a layer of SPIA’s for his guaranteed income, then he created a bucket of money to pay his RMD’s which he used for his discretionary income, and that was about half of his money that did all that. And then he took the remaining half and he invested it more aggressively for inflation protection in an 80/20 portfolio. And then was, essentially, planning to draw that down if he needed it and also put it into ROTH’s for his estate.

Steve Chen: So this was a much more involved … he’s super nerdy about this stuff. But he did actually implement it and I think it’s been … he definitely sleeps well at night and feels good about his decision making. So …

Steve Vernon: Yeah. And that sounds like a very solid plan. And for your listeners, I would encourage them, take the time to put together a plan like that or something close to it. Because what you’ve described isn’t that hard to do if you just pay attention and spend a little bit of time on it. And the way I like to say it is that if you’re in your late 50’s or early 60’s you could be living another 30 years. You want to set up a plan that will last that long. And it’s worth it. To be financially secure for another 30 years, it’s worth it. It’s worth spending several hours of your time putting …

Steve Chen: Totally. So I’d love to go to the next step. You talk about healthcare. I think that’s another complicated issue. And people have the healthcare they get when they’re working, then usually there’s a period of time when their career is over, but Pre-Medicare. And then there’s what you’re doing in Medicare, with traditional or Medicare Advantage. How do you suggest people think about that and build a plan for that?

Steve Vernon: Well, it’s a good question. It’s a critical question for most people. And, just to get people’s attention, I like to call healthcare expenses the big bad wolf of retirement, because you’ve got to prepare for that big bad wolf and I purposefully draw on that nursery fable. We all know what happened to the first two little pigs who didn’t prepare, they had a sad fate. Only the third wolf … I’m sorry, pig, built a wall to protect himself against the big bad wolf.

Steve Vernon: Think of yourself as that third little pig, just to be inspired. And then once you’re inspired to spend some time on it, because it’s going to take some time … that’s the thing I emphasize a lot, is that all this planning takes time, and it’s worth it. So you’ve got to distinguish between before Medicare at 65 and Medicare at 65 and after. And those are two different period that require different strategies.

Steve Vernon: And, so pre-65, you’ve got to find medical insurance somewhere. And it might be expensive, because if you were covered by a health plan at work, chances are your employer is subsidizing 2/3, 3/4 of the cost. And yet you don’t see it because all you do is pay the other smaller portion. So you’ve got to find out how much it costs, because it might be a big part of your budget. And then I might say, “Hmm, maybe I should delay my retirement a little bit.” Because it’s not uncommon for health insurance before age 65 to cost 1000 dollars a month per person.

Steve Vernon: And you’ve just got to factor that into your budget, because 1000 dollars a month is nothing to sneeze at. Exactly. And, so then it might lead you to say, “Well, okay. Maybe I find some part time work. I work at Home Depot, or Starbucks, or somebody that offers health insurance.” That’s one possibility. If you’re married maybe your spouse works and you can go off their plan.

Steve Vernon: But, beyond those two possibilities, now you’re talking about going to an exchange which, depending on which state you live on, may or may not be very robust. You could go on COBRA for a while. COBRA enables you to continue your employers plan for 18 months, but there’s a trap for the unwary there, because you only get 18 months in most states. In California you get 36 months, by the way. But suppose your spouse was covered by your health insurance at work, and as long as you’re within 18 months of Medicare you might be okay, but if your spouse is younger your spouse is going to have a period of no coverage.

Steve Vernon: So these are just little details. I call them traps for the unwary. Well, that was pre-65, do you want me to talk bout post 65? There are more traps for the unwary post 65. Because people think, “Oh, I finally made it to age 65 Medicare, and Medicare is called medical insurance so it must be like what I had while I was working.” Well, wrong, wrong, wrong. Medicare, first of all, doesn’t cover dental, doesn’t cover vision, doesn’t cover hearing, doesn’t cover acupuncture, and some chiropractic. So it’s bare bones. It also has significant deductibles and co-payments. And, so it’s not like the insurance you had while you were working.

Steve Vernon: And, so you’ve got to find some insurance to fill in the holes. And there are two ways of doing that. One is what is called a Medicare supplement plan. Also known as Medigap, or Medicare Advantage plan. And each of those has their pros and cons. It’s not really one is perfectly right for everybody. So Medicare supplement plan, or Medigap, just pays the deductibles and co-payments that Medicare has. And it gives you the most freedom in choosing your healthcare providers. So it’s kid of the most complicated, because you’ve got to piece together Medicare, Medicare supplement. You’ve got to buy a standalone prescription drug plan. And, so you’ve got to do a little bit of work, but then you piece it together and then you have the most flexibility with choosing providers.

Steve Vernon: Whereas Medicare Advantage is more of a managed care situation. You’re with a Kaiser, or a Humana, or somebody like that. And that’s like a one stop shop for your insurance and your providers. And they take care of everything, you just pay the premium, and then you’re pretty much either restricted to the providers in the network or incented to use the providers in network. And I think that’s better for some people who just want to keep their lives simple. But the trade off is they’ll have to use the providers in the network.

Steve Vernon: And, so take some time to figure that out. And it’s worth it, because now you’re talking about the health for the rest of your life, and keeping you healthy and live. So it’s a good use of your time.

Steve Chen: Any good resources that you like to point people to for thinking through healthcare?

Steve Vernon: Well, yes. Actually, my last book, Retirement Game-Changers, has a whole chapter on these issues that I’m talking about. But then you could also get good books on Medicare. Andy Landis’ book on social security and Medicare. And there are a number of good books out there that cover, actually, both social security and Medicare. Then they get into the issues of Medicare supplement versus Medicare Advantage.

Steve Vernon: The other thing I want to say, though, is that a good use of your time and money is that there’s a cottage industry out there of consultants on Medicare and buying some kind of medical supplement or Medicare Advantage plan. For example, one is called 65 Incorporated, and they specialize in this. And that’s a good use of your time and money. Particularly, if you take a lot of prescription drugs, because the prescription drug coverage is really complicated and they do a good job of paying for generics, but once you get into the non-generics some drugs are covered and some drugs aren’t, and some have a good payment schedule and others don’t. And you could really save money by spending a little bit of money with a knowledgeable healthcare consultant.

Steve Chen: How do you find those folks, because it feels like there’s a lot of folks that could be preying on older Americans, trying to scam them. And I think a lot of people do worry about getting misled. Are there good ways to identify the good providers, the good actors in the space?

Steve Vernon: That’s a good concern, Steve. And one thing I would do is start with your local area agency on aging, which is a … it’s a part of the government, federal government, and they serve seniors locally. And they’ve got everybody’s best interests at heart. So they’re good actors there. And they may either provide those services, because some senior centers will provide that service, or they can refer you to someone.

Steve Vernon: But this is also an area that you don’t need to be local. I’ve worked with that 65 Incorporated that I’ve talked about. They’re in Minnesota, I’m in California. It’s all done on the computer. So ask around. And, also, more and more financial advisers are well aware of this. I did a training the other day, virtual training, for financial advisers on these issues. And they are more and more, like, they’re now the coordinator for you. They might invest your money and do other things, but they might refer you to a good healthcare consultant. So if you’ve got an adviser you trust, that’s another source. But pay attention. Go shopping for a good adviser.

Steve Chen: We’ll definitely point to these resources that you’re listing off here in the show notes. And the last thing you mentioned was cutting expenses. So I’d love to get your take on things people should look at as they head into retirement in the budget.

Steve Vernon: Yeah. Let me give you some background on that. I was at the Stanford Center of Longevity two years ago, we looked at the assets and debts of the boomers as they’re approaching and entering into retirement. And when you look at the assets and debts they have, it’s real clear to me that the vast majority of older workers have not saved enough money to retire full time at age 65 under their current standard of living. This is profound. So if you don’t mind, I’m going to repeat it. The vast majority of older workers have not saved enough money, together with social security, so that they can retire full time at age 65 under their current standard of living.

Steve Vernon: Now that statistic is … it was work that we did, but you can see other people who do these retirement readiness assessments, they’re coming up with the same conclusion. And, so these folks are either going to have work longer, or reduce their standard of living, or some combination. And, so what I encourage people to do is assess what your income will be, your retirement income, and that gives you a target for how much you might need to reduce your living expenses.

Steve Vernon: Because the problem I see is that people, they retire and they might have a couple hundred thousand in their 401K, and they just keep spending their money on whatever they were spending their money on without really a plan to make it last the rest of their life. And once they realize, “Oh, here’s my monthly paycheck. This is what I’ve got to reduce my living expenses to.” That’s the process.

Steve Vernon: When I conduct retirement planning workshops and I go through this and I ask the workshop attendees, “How would you cut your living expenses?” Well, I hear, “Okay. We’ll eat out less, and I won’t go to Starbucks, and I’ll cut Cable.” And, so I say, “Well, that’s nice. I’m not going to criticize you. That’s okay. But if you have a big gap, you’re going to have to find a bigger target.” And that’s where I really point people to housing, because housing is still the largest expense for most people, when you consider utilities, and property taxes, and homeowner’s, and maintenance.

Steve Vernon: And so, to me, it’s a possibility for a win-win situation. Because you might be able to downsize your home and move to somewhere that’s actually more enjoyable and more manageable in retirement. If you ever had a family and you had the home out in the suburbs that’s isolated and big, why not move somewhere where you can walk to your local hobbies, your local coffee stores, or whatever? So that’s something I think people should explore is downsizing.

Steve Vernon: In fact, they can do a triple win. I’m making this up. But what if you could downsize and move to a place where you could walk to lots of your daily activities, or take public transportation. And we will do that again sometime after the pandemic. Maybe you could get by with one car instead of two cars. And, so, because transportation and cars are another big expense. But, again, this will take some time, like I’ve been saying, but it’s well worth it. And, so really take a good hard look at how much do you really need to meet your basic living needs and be happy. And that’s really what it’s all about.

Steve Chen: Yep. Yeah. In our product, we help people think through the must-have’s and the nice-to-have’s and build a budget, and forecast it forward. And, yeah. When we started this company we actually helped my mom think through this situation where they had a house that had 4,000/5,000 square feet, 10 acres of land, and out in the country. And it was like, “Do you really need this?” And she ended up downsizing and moving to a walkable area near town, in a cheaper house, and therefore lower taxes. And, yeah. Same thing. Less need for transportation. So it had a big ripple effect and made her a lot more secure. And there’s just less house to maintain. The reality is, do two people need to live in a 5,000 square foot house? Probably not, right? I think the data is that people, no matter how big your house is, they always live in the same five to 600 square feet of it.

Steve Vernon: Yeah. Actually, let me add to that. I agree with, totally, with what you said about your mother. And, let me add to that, is that all too often I see people stay in that big house, and wait, and eventually they get some kind of crisis where someone has a health issue, or maybe dementia is kicking in, and they’re forced to move from that big house and make it too quick. They have to make these emergency decisions. And because they’re too frail now, maybe, to move. And they’re really stuck.

Steve Vernon: And this has happened with a number of my older friends and relatives. And, so really, the best time to make that kind of decision, like your mother did, is somewhere in your 60’s or early 70’s when they still have the vitality and the energy to make such a move. Because in the late 70’s and 80’s it’s just harder and harder to make that move, and then you get your back up against the wall.

Steve Chen: Yeah. I hear you. That’s exactly what she did. She did it in her 60’s and it was a good decision. So how about you? So we went through … those steps are the main steps for the Spend Safely in Retirement Strategy. Correct?

Steve Vernon: Right.

Steve Chen: Have you applied this to yourself?

Steve Vernon: Oh, yeah. So let me just say, I’m age 67. And, as you mentioned in the introduction, a long career as a consulting actuary. It’s kind of funny. I’ve been working in retirement plans since I was age 23, and now it’s my time to retire. So, and I like to say, all of the strategies that I’m talking about, either I do for myself or some version of it. Because I don’t want to come up with some strategy that I don’t think is good enough for our family.

Steve Vernon: And, so in our case, I’m delaying my social security until age 70. My wife worked, and so it made sense for her to start at her full retirement age, which was 66. And we’re delaying … well, we’re not drawing down our savings yet, because I’m working. Not at the same intensity that I used to work at as my career, but I’m working enough so that I don’t have to have social security and I don’t have to draw off my savings. And I’m planning to start drawing down my savings when RMD kicks in for me, which is not going to be age 72. And we’ll see how it goes. Work is fine.

Steve Chen: Right. Did you take a break after your main career ended, before you started consulting? Or did you just flow right into consulting? And now I’m curious when you ended your main career and started consulting? What age was that?

Steve Vernon: Okay. Well, I was age 53 when I left the main job. And that was a little early. But, actually, what had happened is I could see I had enough money in the bank for my youngest child’s college education. And I just thought, “Why not pull the plug?” And it’s earlier than I think a lot of people would want to, but I did it to have some consulting gigs lines up. And, so I had a bridge. And I had just thought, “I’m going to take the plunge.” And that was 14 years ago. And, so I didn’t take a big break, to answer your question. But the first couple of years was kind of a break, because I was doing some consulting but also just flopping around trying to figure it out.

Steve Vernon: And I was fortunate enough, my employer that I retired from, Watson Wyatt, did have retiree medical insurance, pre-65. And, so that was … I couldn’t have done it without that. And, so I acknowledge that’s unusual now.

Steve Chen: Yeah. For sure. That’s a huge benefit.

Steve Vernon: I’m just answering your question.

Steve Chen: No. It’s great.

Steve Vernon: Yeah.

Steve Chen: No. It’s interesting. We’ve had some … another of our guests, Scott Migliori, he retired from Allianz … I think at 48 or something. It was pretty early, feels so early, but he’s making it work. He actually is completely managing his assets, but he has concerns around healthcare as well. Like, how to fund it. And I think it’s a much bigger deal.

Steve Chen: Okay. Awesome. So your book, Don’t Go Broke in Retirement, that expands upon this strategy. What additional things does it cover? Or is there more about the book that you think our audience should know?

Steve Vernon: Yeah. I can say a couple things. First, is with respect to investing, because we talked about that earlier in this show, is that when you think about it, if 2/3 or 3/4 of your income comes from social security and you’re now looking at that 1/3 of 1/2, or whatever it is, do you really need elaborate investing strategies? And I think for that group that has under a million, a common low cost balanced fund, like the Vanguard Balanced Index Fund, or a Target-Date Fund. That’ll work just fine.

Steve Vernon: Actually, our analyses supports going 100 percent in stocks, which I don’t think everybody’s going to do. But, think about it, if you’ve already got 2/3 or 3/4 of your income coming from risk protected sources, that could justify taking more investment risks. And our analyses, which I talk about in the book, show this is the investing dilemma that all retirees face, is that investing in stocks, most of the time, but not always, will generate more income for you. And it’s that, “but not always,” issue that people get worried about.

Steve Vernon: But when I look at different projections … I projected out retirement incomes for various scenarios, and there have been historical periods of time where the stock market has generated way more income than investing in bonds. And then there are times when it doesn’t. And most of the time it does more, but not always. And that’s the dilemma that people face. And that’s why I really think you’ve got to invest in the market and use that money to cover your discretionary living expenses. Your wants, as you would say. I think that’s what you said.

Steve Vernon: So, anyway, I go into that issue in the book. And then, also, there’s a chapter on my website that contains more details on investing in stocks that I didn’t put in the book. That’s one thing. But you said, “What are the other things that we haven’t talked about?” Is that I do have some refinement to the strategy to cover some situations. And so, for example, I hear commonly people say, “I want to travel in my early years of retirement where I’m still healthy and vital to do that.” And, “But how do I do that responsibly, because I don’t want to use all my money up and then be poor later on?”

Steve Vernon: And, so I cooked up the concept of a travel fund bucket. And say, I’ll just give you an example. Suppose you think you’re going to spend 5,000 per year on travel for the first 10 years of your retirement. So five years times 10 is 50,000 dollars. Set aside that 50,000 dollars. That’s going to be the money you’re going to spend on travel. The rest of your savings, invest it and draw it down like we’ve talked about. Either annuities or whatever. And if that money and money … if the money you invest and draw down, or the annuity and social security, is enough to cover your regular living expenses, not counting the extra travel, then you’ve set up a good plan to spend extra money in your retirement and not feel like you’re jeopardizing your financial security.

Steve Vernon: So the travel fund bucket is one situation. And I’ll just name the others. I won’t go into detail. But how do you help your kids? Sometimes you want to help the kids with a down payment on a house. What if you’re in poor health? These are the kinds of things that I have refinements and adjustments to the strategy I talk about.

Steve Chen: Okay. That’s awesome. Well, I think people should definitely check out your book. Yeah. A couple of quick thoughts on the expense side. One thing we like to remind people of is that the data shows that the average real spending declines one percent a year. So this is inflation adjusted dollars in retirement, so every decade it’s down 10 percent. So if you head into retirement you’re thinking you’re going to be spending 80,000 a year. Well, 10 years later you’re spending 72,000. This is on a real basis, so it’ll appear more material to you. And then 10 years after that it’s going to be down again into the 60,000 dollar range.

Steve Chen: So you need to think about that. And people talk about the go-go, the slow-go, and the no-go years. I think, reminding folks that, “Hey, you only live once, you’re only healthy once. And it’s good to take advantage of that time,” is important because you can save a bunch of money and then get to be 80 years old. And if you can’t really get out and about then you’re not going to take advantage of it.

Steve Vernon: Right.

Steve Chen: Yeah.

Steve Vernon: And I’ve seen that day that you’re talking about. I agree with it. And the only thing I’d add onto it is that a lot of people will see their spending decline in retirement, and then it spikes up in the last year or two for long term care. And I think a responsible person would plan for that time. It doesn’t mean long term care insurance, necessarily, but maybe it’s setting aside some money or holding your home equity in reserve. Anyway, that’s the only exception to the… But it’s, actually, it’s more of an exception. It’s a scare tactic that long term care insurance agents will scare you on. But the odds of bankrupting yourself in long term care expenses are low. They’re still possible, but they’re pretty low.

Steve Chen: Right. Well, and I think, also on the investing side there are so many ways to invest and then draw down your money that … we’re thinking about how to make it conceptually simpler. I know there’s the paycheck thing that Glen did, there’s your Spend Safely strategy, some people use a bucket strategy, some people do the four percent draw down.

Steve Chen: But it is good for folks to get familiar with these different methods, understand the risk with each, arrive at a strategy for themselves so that they can feel like, “Hey, I’ve got a game plan for how I’m going to generate income. I can sleep well at night.” Especially with this market. It’s going up and then today it’s diving. So if you’re fully invested and you need that money it can definitely be something that keeps you up at night.

Steve Vernon: Right. And I think, if you have a plan, you will feel better. You’ll sleep better at night. I keep coming back to your listeners. You’ll feel better if you make a good plan.

Steve Chen: For sure. So for you, Steve, any huge lessons that you take away as you … you’ve been working in retirement and planning your whole career. You’ve seen this for decades. Do you feel like its getting worse or better for folks? Where do you think it’s going to go in the future?

Steve Vernon: Well, good question. At least for me, personally, I feel like this is some of the best years of our lives, because we aren’t worried too much about finances. We still have to pay attention. But between what’s going to happen with social security and all that, we feel fairly secure. We’re the lucky ones in this pandemic, because our social security, our Medicare, we don’t worry about losing our health insurance, we don’t have kids in the home that are schooling. We have grandkids. They had their own.

Steve Vernon: So your 60’s and 70’s, if you do a good job, can be a period of amazing freedom and independence. And live how you want to live. Meaning, if you want to take a trip, take a trip. If you want to learn to play the ukulele, my wife and I have ukulele’s we bought and we’re learning how to play it. We’re still working, like you say. So it can be a really nice time, but you’ve got to spend the time to put it together, really.

Steve Vernon: Now, I got to say though, the pandemic is making it worse. It’s harder to work part time for a lot of folks if they aren’t in a job that lets them work virtually. And, so we’re in tough times. But the strategies that I talk about in Don’t Go Broke in Retirement and my last book, Retirement Game-Changers, are designed to go through tough times. Because, when you think about it, you’re in your 50’s or 60’s and living another 30 years, how many stock market crashes are you going to experience? Several. A handful.

Steve Vernon: So, by design, we need to get through these. And it was very gratifying to me in March and April, I was getting emails from attendees of my workshops and readers of my books saying, “The world is melting down right now and I feel pretty good. So, thank you.” So if you spend the time and do it right it’ll help you feel a lot better. And then you have that freedom to go enjoy your life.

Steve Chen: Yeah. I think that’s right. It’s a great point, too. When you have a plan and you know that it can handle the good times and the bad times. When the bad times invariably come you’ll be like, “Okay. Well, I still have the strategy and here’s what we’re going to do.” Or, “We’ll do nothing, because we feel confident about the situation.” And, yeah. You’re exactly right. We are seeing this volatility in our lives. Doesn’t seem like it’s going to go away. The volatility is going to be here.

Steve Vernon: Right. And you’re probably seeing the analyses that I’ve seen, is that the worst thing you can do in a stock market crash is panic, and sell, and get out. And, so you’ve got to have a strategy to ride it out, because when it’s going down it doesn’t feel very good. I can tell you from experience, at someone my age. And yet you’ve got to think, “Okay. But, I’ve got a plan. That’s the plan. I’m going to stick to my plan.”

Steve Chen: Right. So how about you? What’s on your forecast as you look forward in your life? It seems like you’ve … I see you doing the Society of Actuaries work, and obviously working with Stanford, and writing books. I was also just, as an aside, interested to see that you have a third degree black belt in Akido. That was a surprise. But any big things you’re planning for?

Steve Vernon: Well, we talked about it. But, I appreciate the question, is that I plan to continue working in the way I’ve been doing. My passion really is helping older workers figure this out. This out, meaning the retiring and all that. Because it is a challenge, when I talked about the situation of most older workers. And, so I’m just passionate about helping people with these very real challenges. And I plan to keep doing that at least until age 70, and then I’ll have to reassess at that point. But I do, as I mentioned, I’ve got time to pursue other interests. We’ve got grandkids but they live on the other side of the country, so I’ve got to go see them. But that’s, basically, the plan right now, is to keep doing that.

Steve Chen: Yeah. Nice. Well, hey. It’s good. It’s good to have that purpose and stay engaged. It’s definitely super important for your mental and emotional health, right? To have that idea of something that you’re going to retire to or something that you’re planning to take up as you leave your main career. And you had that, and continue to have that.

Steve Vernon: Yeah. And let me add, which is also very gratifying, is if you have the financial freedom like we’re talking about you can spend time helping your adult children and if you have grandchildren. And some of my friends here, in a similar position that live so close, they’re babysitting right now which is very helpful if the kids are homeschooling. We’ve actually done some virtual schooling with our kids across the country.

Steve Vernon: But to be there for your adult children and your grandchildren, and to be that senior mentor to … and be the example that they can aspire to when they get to this age. That’s very gratifying to help the next two generations. Our adult children and then their children. It’s very gratifying.

Steve Chen: So are you doing Zoom calls like this with them, or FaceTime, when they’re across the country?

Steve Vernon: Yeah.

Steve Chen: Yep.

Steve Vernon: Right. And it’s interesting to watch. The four year old really can’t spend a lot of time in front of the screen, but the six and nine year old are spending time with us. And we will read to them and interact just with them. Not with … the parents don’t have to be around at that point. And what’s really sobering is, because of the pandemic, a lot of kids now are very…Now at working with Zoom and computers, which is a mixed blessing.

Steve Vernon: But I think that is actually a role for seniors to play. This pandemic has been a whack over the head, but now we know the power of being there virtually. And that’s a good thing as long as it doesn’t get overused. So, yeah. And that’s actually, for seniors, they don’t have to get on the airplane or in the car. They can still be of value to their family by spending time with them virtually. It’ll be a mix. It’s in person and virtual, but it’s another tool.

Steve Chen: Yeah. No, it’s interesting to hear that you’re doing that. We have one kid in college, one kid in high school, and one kid in middle school. And the ones in secondary school are Zooms all day long. Or Zoom is part of the day and then trying to get them to work. And, indefinitely, they need the attention. They need to have the live interaction. You can’t just give a kid a worksheet and be like, “Hey, go teach yourself math.” Interacting with their peers is important. So, anyway, that’s cool.

Steve Chen: All right. Well, look, as we wrap this up, any last resources that you would suggest? We’ll definitely have a link to your book, Don’t Go Broke in Retirement, and to the work you’re doing at Stanford, and with the SOA. And some of the other stuff that you mentioned. But, anything else you want to call out or people you want to call out that are good resources?

Steve Vernon: Well, I think we’ve covered it. Both my books, Don’t Go Broke in Retirement and Retirement Game-Changers, they have lists of resources in there that I think are good. Your website is there on the list, because I respect your website. And I list websites where … annuity bidding platforms, for example, where you can get annuity quotes that are cost effective. A couple of different social security analyzers which I respect. Open Social Security is one of them. So in my books I list the resources that I respect, and there’s a lot of resources out there.

Steve Chen: For sure.

Steve Vernon: Yeah.

Steve Chen: Okay. Well, we’ll link to it. We’ll point to that stuff. And, yeah. Appreciate it. So, look, I’m going to wrap it up then. So thanks, Steve, for being on our show. And thanks Davorin Robison for being our sound engineer. Anyone listening, thanks for your time. Hopefully you found this useful. Our goal at NewRetirement is to help anyone plan and manage their retirement so they can make the most of their money and time.

Steve Chen: And if you made it this far I encourage you to check out a couple things. One is our Facebook group. So just Facebook/NewRetirement. And also our site and planning tools at NewRetirement.com. And then, finally, we are looking for reviews. We are reading them, and trying to adjust what we’re doing here on the podcast based on them. So if you have the time to leave us a review that would be really appreciated. So, with that, thank you and have a great day.

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