We're Almost Millionaires... Can We Reduce Savings?

You've spent 25 or 30 years doing the right things... consistently saving for retirement, staying invested through market ups and downs, and building a nest egg that’s now approaching $1 million. But as retirement gets closer, a new question starts to come up: Do I really need to keep saving this much?

In this episode, we explore what it actually means to be “on track” for retirement and whether reaching a money milestone means you can finally ease up. 

For the video version, transcript, and show notes, visit thewealthmindsetshow.com/s2e43

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Transcript

You're listening to The Wealth Mindset Show, where Hixon Zuercher Capital Management's team of finance professionals, portfolio managers, and a life coach come together to tackle complex topics in finance and retirement planning so you don't have to. From investment strategies and wealth management to tax planning, retirement income, and aligning your money with your values and purpose, The Wealth Mindset Show offers the tools to thrive.

Austin Wilson:

All right. Hey, hey, hey, welcome to The Wealth Mindset Show, where the Hixon Zuercher team will have conversations on managing wealth, navigating retirement, and making smart decisions for a secure, meaningful future. I'm Austin Wilson, Chief Investment Officer at Hixon Zuercher Capital Management.

Josh Robb:

And I'm Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. And joining us today is Jordan Shaw, one of our Wealth Advisors here. And we are going to be talking about if you're at or right around that millionaire mark, you cross that threshold, does that mean you can back off the savings? What does that mean for your financial planning and your savings rate?

Austin Wilson:

I think it's interesting that time makes numbers very, very, very different in our minds. But if you were to say I'm a millionaire in 1975-

Josh Robb:

That was a big deal.

Austin Wilson:

... that was a freaking huge deal. Think about the compounding effect of inflation since then. The million dollars does not go near as-

Josh Robb:

Correct.

Austin Wilson:

So that's kind of what we're going to be talking about today is how I think some people get fixated on a number, and that number, million dollars for example, was a number that probably meant something a long time ago. And today, it's not insubstantial by any means.

Josh Robb:

No, it's still-

Austin Wilson:

It's still a lot of money.

Josh Robb:

... a big accomplishment.

Austin Wilson:

But it doesn't do what you think it did back in the day. So yeah, maybe you've been saving 25, 30 years, you've been working, you got a nice nest egg put away. You've been so consistent, and this is what we'd be so proud of you, you've been consistent at living below your means, saving the difference. That is what we preach to all of our clients and prospective clients that that is how you make wealth over the long term.

So you got a nest egg. It's almost a million dollars. You're maybe in your late 50s, early 60s. Your questions that you might start asking are, wow, I'm getting close to a million dollars. And we would say maybe these questions hopefully aren't coming from our clients because we've given them more realistic maybe numbers. But this would be if you're maybe you're trying to do this on your own or whatever, I'm getting close to a million dollars. Do I need to keep chucking money away?

Josh Robb:

I hit it. Did I get the goal?

[2:23] - Why People Ask This Question 

Austin Wilson:

Did I hit the goal? Do I need to keep saving 15% on my check? Can I finally maybe stop saving or save less and start enjoying more of that money that's coming in every month? And hey, I've worked really hard for such a long time. Maybe I've earned the right to ease up on my savings. So why would people be asking these questions?

Josh Robb:

Well, the first one is you mentioned they've been doing this for maybe 25, 30 years. So part of it's just, man, when does that stop? When can I actually enjoy all this hard work? You're tired from just the monotonous savings over years and years and years. What else?

Jordan Shaw:

Yeah. Another thing is just the stage of life that you're in. Kids might be out of the house, your expenses are going down. Maybe you're thinking you can use some of that extra money and put it towards living life a little bit.

Austin Wilson:

A sports car.

Jordan Shaw:

Almost like a pre-retirement sort of. Yeah, buying a sports car, going on a bigger vacation. And there may be time for some of those, but these are the things that come up. Maybe your mortgage is almost paid off. You're anticipating expenses to change. Maybe they're not yet, but they might pretty soon. And another thing is that's also the stage of life where most people have the most money coming in from their job. So working a long career has its benefits in that regard. So that's another thing that comes into play. And you just want to enjoy life when you're younger.

Austin Wilson:

Well, I think another thing that starts happening once you get into your late 50s maybe, or mid to late 50s, early 60s, is you start looking at your age, and maybe your health, and saying, okay, well, I'm doing pretty well. I'm getting around, walking, maybe hopefully running-

Josh Robb:

Staying active.

Austin Wilson:

... doing some active things, whatever it is. And I feel good. I want to feel good and enjoy it while I can.

Josh Robb:

- Wait too long and then you can't even enjoy the money.

Austin Wilson:

If you wait to start spending your money until you're 80, by the way, your financial situation's going to look a lot better, but you aren't going to be able to enjoy it. So that's the thing right there. They want to enjoy life while they're healthy and relatively able.

[4:28] - Is $1 Million Enough? The Biggest Misconception

Austin Wilson:

So I guess let's talk about the biggest misconception here. A million dollars isn't necessarily enough. And I'm putting enough in air quotes. So if you're listening to this on your podcast player, air quotes. Is a million dollars enough? For some people it might be. And for others, it might look very, very different. So let's work through some examples. So talk about a couple.

Josh Robb:

And it comes to the idea, and this happens a lot, Jordan, I know we get asked this question all the time is someone will sit across from us, and say, "How do I compare to others?" Or, "Is this the right spot?" And it's such a broad question because there's so many variables. And we'll give an example. Let's say we have two different people. The first one saved a million dollars.

They worked at a place where they also have a pension. They were frugal, have a good lifestyle where they're not overspending. They have excess cash, and they're going to retire 65 and they have no debt. If you look at that and they got a million dollars, if their Social Security and pension income covers the majority of their needs and then the withdrawal rate, and that's really what we're going to get to in the end of this is that's the key. But they may say, "Yeah, a million dollars is more than enough."

And then this other person comes in, has a million dollars saved, they don't have a pension, they want to retire in their 50s, and they want to buy a vacation home and they want to take trips and they still owe debt. That million dollars may not cover all those needs and goals. And the difference is really just the expectation of your expenses once you start drawing from that money. And it really comes back to that.

So what does a million dollars provide? Well, if you use the long-term historical standards in our industry, a safe withdrawal rate is around 4%. We've had episodes, we've talked about that. It could be higher than that depending on all the rules and things you do. But if we just use that 4% withdrawal of a million dollars, $40,000. So can I take $40,000 out of the portfolio each year, and increase it for inflation, and take care of all my needs? Well, if I have a pension or Social Security or other sources, rental income or whatever it is, maybe that $40,000 is enough. If it's not, that million dollars isn't quite where you need it to be to meet those goals.

Austin Wilson:

I think you're pointing out that the account balance, or your investment balances in total, because there's probably many different accounts, that does not tell the whole story. Because that gives you one piece of the story. And then there's the other two components are, yes, you've got cash coming in and you've got expenses going out. And those are levers, in addition to your account balance, that all work together to give you what your lifestyle can look like and what your spending can look like. And that's going to be very different for very different people no matter what your account balance is. But if it's all a million dollars, there are so many more variables.

Josh Robb:

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Austin Wilson:

So if I were to say, Josh, is a million dollars enough to retire? I'm going to say that you're going to say-

Josh Robb:

It depends.

Austin Wilson:

It depends. Which is what you say on every single episode, but it's really, really true. There's a lot of variables.

Josh Robb:

Yeah. And it's also unknown. So how long am I going to live is a piece of that that matters. But no one knows the answer. Most people don't know the answer to that. And so you could look at family history, how you're doing, if you know any diagnosis that you've had, but that's a piece of it. If you have a million dollars and you got five years to spend it, you could probably be pretty good with that. If you have a million dollars and you got 40 years, it looks a little different. You got to be a little more conservative on how you withdraw that money. So you're right. There's a lot that goes into it. How old you are, what expenses you are expected to have, where other income's coming from. Taxes matter too.

Austin Wilson:

They do.

Josh Robb:

So if you're retiring in your 50s and all your million dollars is in IRA or 401(k)s, that's a problem because there are some rules to that on how and when you can take money out. Healthcare matters. There's a lot of things that say is a million dollars enough, you got to answer all these other questions first.

Jordan Shaw:

Yep. And you mentioned it too earlier, Austin, where some people might be asking this question, whether it's one million or two million, or whatever it is, and they might be doing it themselves. How do they approach a lot of those variables? And actually, I had a little bit of homework that I did coming into this. So two fun math problems here for you. The first one, stay tuned for the second.

The first one is an example of these variables. Let's say someone is coming in, and they're assuming a 2.5% inflation rate over the 30-year retirement that they have. Very basic, a very common maybe number to use. And they're expecting with that, let's say they normally spend $50,000 for round numbers. They're inflating that. Every year they're spending 50,000 plus a 2.5%, and then it compounds every year for what they're trying to keep up with inflation. That would total, total cumulative spending over the life of their retirement, $2.2 million. And that might be what they're using in their plan for what their portfolio needs to support.

But let's say inflation's closer to 3.5%. That increases the total cumulative spending over their retirement by a little more than $400,000. That's not nothing.

Austin Wilson:

That's not nothing.

Josh Robb:

That's a good chunk of money.

Jordan Shaw:

Of all these variables. So it definitely makes a big impact to that question. Is it enough now? It really does depend. And you have to not only be as confident as you can be with these variables, but know that you also need to build in some flexibility with that. So can you spend more? That potentially could reduce that flexibility.

Austin Wilson:

Yeah, absolutely.

[11:09] - Sequence of Returns & Your Final Working Years Matters  

Josh Robb:

And along with that, and you've kind of touched on it with adjusting the inflation number having an impact, but your rate of return matters. So that million dollars at the start of your retirement needs to grow and compound through retirement to give you those extra years. It's not going to be a stagnant number. And how and what you do along that way matters. How much risk you take, how you invest it. And so that comes to, in a sense, sequence of return risk is how much risk am I taking? What does the market give me along the way? And that has a huge impact. In fact, that's one of the largest impacts on a retirement plan is what does the market provide me along the way? And when does it provide that? The sequence matters as well.

Austin Wilson:

Well, and yeah, think about this. If you have a million dollars, that's the example we're talking about today. So you got a million dollars, and this really works on both ends of retirement. A couple years before, a couple years after, we've talked about sequence of returns many times. But you have a 30% bear market, which by the way is not necessarily uncommon, and it takes three or four years to climb out of that. If that happens when you retire, you're down to 700 and some thousand dollars. And if you don't have another income source, you're pulling while things are down. And that's not a great thing. And that really messes up retirement plans.

Josh Robb:

It does.

Austin Wilson:

So sequence of returns is huge in terms of its importance here. There's just a lot of risk there that I don't think people are taking into consideration.

[12:32] - Can You Reduce Your Savings? 

Josh Robb:

And so in the end, when someone comes to us, the bigger question is, what are your primary goals? What are you really trying to achieve? And if one of those goals is, hey, if I can reduce spending a little, or saving a little bit, increase my spending, do some more things, it's actually going to help me work longer. Maybe that actually answers the question on what we're trying to accomplish of more years of actual working income by reducing a little bit of savings to give me that boost to encourage me to continue on. So can you reduce your savings?

Austin Wilson:

Maybe.

Josh Robb:

Yeah. I mean, the answer is yes, you can.

Austin Wilson:

You can.

Josh Robb:

What is the trade-off? Because there's always a trade-off you have. And that's really what it comes down to. And as you understand what you're taking for what you're giving up and you're okay with that trade-off, that's totally fine. Hey, if I reduce my savings from 15 to 12, or whatever it is, I'm going to have to work three more years. Okay, I'm okay with that. You got to just know the trade-off of whatever that is.

And in the end, you have to decide top priorities, clearly articulate those. Because sometimes if you're saying, well, I'm doing this and then I'm going to do something else, what's the likelihood you're going to do that separate thing that offsets it? So in my example, I'm going to work three more years. Well, you get to that original retirement date and you're like, I would really like to stop now. Well, you had an assumption and you changed it, and those are the things. You got to be honest with yourself.

Austin Wilson:

Exactly.

Josh Robb:

How Likely am I going to follow through with the changes I'm making and still stay on track?

Austin Wilson:

I also feel like there are situations where it's a much more clear answer. There are people who come in, and they want to change something up and maybe retire early, or they want to change something up and stop saving. And they have done so much work on the front end. And based on their assumptions of lifestyle spending and all this stuff, there's no way that this will be a problem. And we can say with confidence, if you stick to that plan, yeah, do whatever you want. You're going to be totally fine.

And then there are also the other side of situations where it is like, no, we want you to be able to do what you want. We want you to enjoy life. We want you to do all these things. However, the numbers just aren't there. So we got to stick with the plan a little bit longer. But there's more examples, I think, that are in the middle than either of those situations.

Josh Robb:

Yeah, there's usually a compromise somewhere in there.

Jordan Shaw:

And looking at, sometimes it's helpful to show exactly what are you giving up? We can run scenarios. We do it with clients all the time and different trade-offs. So I thought it'd be interesting to look at what if someone says, "I'm going to reduce my savings near the end of my working career, into retirement. And what does that look like?" So let's say someone is making $150,000. They're six years old, they're going to work five more years, but they're backing off, they're contributing 15%, saving to retirement. They want to back it down to 10. That extra 5% of their 150 is 7,500 a year. So that 7,500 being contributed for, or not contributed in this case, for those last five years. And then that amount staying invested for 30 years, what are they giving up there in dollar terms? It's only $7,500. It's only a 5% change for five years at the end of my career. So what's the actual dollar amounts here that we're talking about?

And so like I said, did some homework, ran some numbers there. And let's say it's a 6% return that we're using annually over a 30 years retirement, last five years of working. What do you guys think they'd be giving up with that 7,500 a year?

Austin Wilson:

So 7,500 a year really only in the impacts five or six years, right?

Josh Robb:

Five years.

Jordan Shaw:

Basically that's invested.

Austin Wilson:

So they've already done all the legwork. They've already done all the legwork up until then. I mean, this is the interesting thing that I think about is if that was $7,500 on the front end, the number would be astronomical.

Josh Robb:

Oh yeah. Compounding.

Austin Wilson:

But because of the compounding and because you have much more of your nest egg at work already at that point, the contributions actually matter a lot less later in your career. So that's 2,500, just at a round number, say it's five years, we're talking 35, $40,000 before it's compounded. Maybe it's 50 grand.

Jordan Shaw:

At the end of 30 years?

Austin Wilson:

I'm talking though just for those five years.

Jordan Shaw:

For those five years.

Austin Wilson:

So you're talking, what is it, 30 more years into retirement? Yeah, that's got to be half a million dollars. A couple hundred thousand.

Jordan Shaw:

A couple hundred. It's over $250,000 is the total.

Austin Wilson:

Oh, at 6%. Yeah. Yeah.

Josh Robb:

But that's the trade-off.

Jordan Shaw:

That's the trade-off.

Josh Robb:

Of that time period, losing $200,000 access in a sense is the trade-off.

Jordan Shaw:

Yep. And obviously that's an extreme-

Josh Robb:

May or may not be worth it.

Jordan Shaw:

... example too, because there's all those other variables that did not go into my quick math there too. But this is really, like we've been saying, there's the trade-off that as long as it is something that you feel confident when you're addressing that question in what you are giving up for what you're gaining, because it's not to say that, we're not sitting here saying you shouldn't, and save every dollar. No, you definitely want to live your life. But just being aware of that, I think is paramount to making that decision final.

Austin Wilson:

A word comes to my mind that I've heard Josh Robb say before. Moderation.

Josh Robb:

Moderation.

Jordan Shaw:

Moderation.

Austin Wilson:

The math will always, always, always say spend less and save more. The math is math. That's just simple math. But you don't know how long you're going to live. You don't have a million years with your kids at home. You don't have your parents around maybe forever. Spend the money and enjoy them to some extent within reason, be responsible, but it's okay to do that. You have to do both.

Josh Robb:

Optimizing doesn't optimize happiness. Because if you're going to optimize, you're going to spend less, save more, just like you said, if you want to try to maximize that out. But that moderation says, I'm going to try to accomplish both goals as best I can between the two. And as long as, again, you have a clear understanding of that, I think the longevity plays out easier that way. It's easier to stick to that plan.

[18:32] - Our Honest Recommendation in This Scenario

Austin Wilson:

So guys, what would you recommend in terms of this seems like a great opportunity to talk to... This is a professional thing. This is where you're going to get your value in a professional.

Josh Robb:

Yeah. Just working through these scenarios, walking through with someone who can look at it objectively. Because you can get so caught up in your goals, your dreams, your framework that you may have a blinder on to something you're missing in there. You're so caught up on some of these numbers, you miss that 2.5%, while it's more recently been inflation, may not be the long-term number you should be using. You can miss that. Having a professional working with you gives you that opportunity.

Austin Wilson:

Jordan?

Jordan Shaw:

Absolutely. And it's something that a good advisor is going to take the time to fully understand your whole picture, asking all the right questions, questions you don't even know to ask, and that make a huge difference when it comes to making these sorts of decisions. And it's before these decisions need to get made is the best time to really start looking at everything. So working with someone, building a relationship with someone that you trust, that looks at everything, doesn't just look at one account or one insurance policy, or whatever it is. It's really someone that takes it all into consideration is really a huge part of your success in retirement planning.

Austin Wilson:

Yeah, I agree. And I think one thing that, as a humanity, when we're looking at finances, we can do a little bit better at is avoiding behavioral biases like anchoring. This whole premise of this discussion was built on the hypothetical example of, hey, I hit a million.

Josh Robb:

That number.

Austin Wilson:

But it's a number. A lot of people get a number in their head. Maybe it's two million, maybe it's five, whatever. That number is not the goal. There's a lot of things going on to get to the goal. The goal is sustainable plans and lifestyles and funding your goals. The goal is not a arbitrary dollar amount.

So I think as much as as society as we can get to, all the kids talk about, it's on social media. "Yeah, I want a million dollars liquid." That's another anchoring bias. These anchoring biases don't help you get to your goals. So let's just keep our eye on the plan and we'll have some numbers along the way that are going to get us that plan.

And as you guys talked about, I mean, yeah, if you guys want to talk about working with an advisor, visit hzcapital.com. We'd love to talk to you. If you found value in our show, don't forget to subscribe. We're going to drop new episodes and hopefully help people out along the way. And otherwise, follow us on social media, stay connected, and we'll catch up next episode.

Josh Robb:

All right, talk to you later.

Austin Wilson:

Thanks. Bye.

Thank you for joining us at the Wealth Mindset Show, where we tackle the complexities of finance and life planning to help you align your wealth with your values. We hope today's conversation provided value and clarity as you navigate your financial journey.

Your hosts work for Hixon Zuercher Capital Management, and all opinions expressed by them or any podcast guest are solely their own and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment, and any investor attempting to mimic index performance would incur fees and expenses that could reduce returns. Securities investing involves risks, including the potential loss of principle, and there is no assurance that any investment plan or strategy will be successful.