Build a Forever Paycheck with Jean Chatzky of HerMoney
NerdWallet's Smart Money Podcast
The episode explores the transition from accumulating wealth to 'decumulation' in retirement, featuring expert Jean Chatzky. It provides str
Key takeaways
- The traditional 4% rule is increasingly risky due to inflation and market volatility in the decade surrounding retirement.
- Jean Chatzky recommends dedicating 20-30% of assets to a structured 'paycheck' via annuities or TIPS ladders to cover essential needs.
Main topics
- Retirement decumulation strategies
- The Forever Paycheck concept
Notable quotes
The flip side of the equation, which is called decumulation, turns out to be a really messy puzzle, both in math, but also in emotion.
Conclusion
The episode offers practical frameworks for managing retirement income
Transcript preview
Speaker 5 (0:00) If you save for retirement the right way, you might just guarantee yourself a paycheck for life. But accomplishing that goal is not easy. Today, we've got some tips. Speaker 5 (0:11) Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. And Speaker 1 (0:18) I'm Elizabeth Ayola. Now, this episode, we are joined by the fabulous Jean Chatzky, host of Her Money Podcast and also the author of the new book, The Forever Paycheck, The New Retirement Strategy to Spend More, Worry Less and Never Run Out of Money. That sounds like a dream, Jean. How do we achieve this dream? Well, it's a step-by Speaker 2 (0:40) -step process, and I am happy to take you through it. But I just want to tell you that a lot of people are not getting there. Because what we're finding is that although we've kind of gotten with the program when it comes to accumulating money for retirement, saving it, investing it, the flip side of the equation, which is called decumulation, turns out to be a really messy puzzle, both in math, but also in emotion. Can Speaker 5 (1:12) you break out two of those challenges there? So obviously, you know, we hear about the 4 % rule. You might be able to take 4 % of your savings annually and continue to have enough to last you as long as you might live. But that emotional part, too, of going from accumulating for decades to actually spending it down can be a really scary experience. Speaker 2 (1:29) Yeah, the 4 % rule. four-ish percent rule, however you want to come at it, has made a lot of headlines in recent years because it hasn't held up as well as expected. And there are a lot of factors involved in that. The volatility of the market, inflation, interest rates. Bottom line, if you hit a bear market anywhere in the 10-year window before or after you retire, The chances that the 4 % rule serve you as well as you hope are not really good enough, at least not good enough for me. Plus, by the time you get to retirement, you likely have money in a whole array of accounts. You've got your tax-deferred retirement accounts, and maybe you've got a Roth where you don't have to pay any more taxes, and you might have a taxable brokerage account. The struggle to figure out where to get money from in a way that minimizes the chances of bumping you up into the next tax bracket and doesn't subject you to really pricey Medicare penalties is difficult. So that's the math problem. The emotional problem, I think, is even more interesting. And it's that... We have gotten so used to or we get so used to putting money into our accounts over 30 or 40 years and watching those balances go up and up and up and up. Painful. Spending is painful. Spending turns out to be highly uncomfortable. And so as a result, what we're seeing is that retirees just aren't doing it. One survey that I pulled. of retirees 20 years into retirement showed that they had spent only 12 % of their money, which to me says Speaker 5 (3:23) they Speaker 2 (3:24) are leaving an awful lot of joy and an awful lot of life on the table. That Speaker 5 (3:29) speaks to the behavioral bias of loss aversion and how it can feel so much more painful to quote unquote lose money, even though you're spending the hard earned money you've been accumulating for decades. It just feels... bad to actually see that number go down when, to your point, Jean, that is actually lost joy. That's a lost opportunity. There's a big opportunity cost to not enjoy what you've been spending or saving for all those years. Speaker 2 (3:52) You're totally right. It feels like a loss. And so people just... grab on to that number that they had when they retired and they go to great lengths so that the number stays where it is, even if they're not super concerned about leaving money for their kids or their charities or other things. Speaker 1 (4:10) Jean, this reminds me of a listener that we had on kind of earlier this year named Paolo. And his issue was that he had achieved fire and he was struggling to spend it down. And it was a huge emotional issue as we're talking about here. So my question is, how can people start emotionally preparing, whether they're 30 years away from retirement, five years, for spending that money down? How can they get rid of that emotional block and maybe the guilt that they feel? Honestly, I think Speaker 2 (4:37) that getting rid of the emotional block is really... difficult. And so what my suggestion is, and the solution that I lay out in the Forever Paycheck, is that you take a chunk of your money, certainly not all of the money in your retirement accounts, but a chunk, 20 to 30 percent in most cases, and you use it to buy yourself or build yourself a paycheck. You make that decision one time. You set it up. You know that that paycheck is going to continue to come. And then you take the rest of your money and you invest it. You put it in stocks. You can actually invest it more aggressively because you know that your paycheck, when combined with Social Security, will cover those things that you absolutely need, but also those things that you really don't want to do without. Once you've got that locked in, You've got a lot more freedom on the other side. And Speaker 5 (5:39) setting up this paycheck, I imagine, is different than investing in an annuity where you're actually getting a specific financial product. This is you kind of setting it up on your own terms. Speaker 2 (5:47) Yes and no. There are two ways to set up a paycheck. You can buy yourself a paycheck using an annuity or you can build one. using various investments that are more suitable for these purposes. You can look at things like building a tips ladder or a bucketed portfolio where you've got a certain component that you know will spill off each year. But they come with different pros and cons. And the way that you should choose to craft your own paycheck really is dependent on your personality. If you are somebody who doesn't like risk, who's not super comfortable with it, and who wants to know without a doubt that those needs and wants are going to be covered, then I think you go the annuity route. If you're somebody who has a lot of FOMO and you believe that if more of your money is not in the markets, you're going to be really regretful. if the markets go on a tear in a good way, then you go the investment route. But there's a lot that can be done with insurance, with annuities, in terms of providing for the sort of increased longevity that we are seeing these days. Speaker 1 (7:11) Yeah, some people are like 20 in our audience, Jean, maybe 20, maybe even 30 years away from retirement. So when should they start planning for creating this paycheck? Is it something you do closer to retirement or is it something people can start planning out now? Because like we said earlier, some people are already saving in their Roths and their 401ks and in all of these investment vehicles. But then retirement comes and they have no idea how to spend the money down. I Speaker 2 (7:33) think this is something you start looking at. 15, 20 years before retirement. So the older millennials in your audience should be thinking about these things and how they're going to create an income. And then when you are 10 years out is when you can really begin shopping in earnest. For your much, much younger listeners, The good news is that some of these solutions are going to make their way into their work-based retirement plans. We can see them coming. They're not quite there yet. They're not fully baked, but they're definitely on the way, and they're going to be available in a way that for those of us who are slightly older, they're not. And we actually have to do this for ourselves. Speaker 5 (8:23) Well, we want to get to a couple of questions from our listeners and talk with you about them around retirement savings. But before we do that, I'm wondering if you could just leave one final nugget of wisdom from your book with folks listening, what would that be? Speaker 2 (8:35) The accumulation process, the act of saving for retirement has been made much, much easier because we've got a lot of behavioral tools in the mix now that help us out. We've got auto enrollment. We've got auto escalation. We've got target date funds. None of that exists. for decumulation, for the flip side. And so you have to get used to the fact that you're going to have to plan for this phase of your life as much as you planned for the run-up. Speaker 5 (9:08) That's right. And people have a lot of agency and options more than they may actually be aware of. So I'd encourage folks to check out your book to learn more about that. Speaker 2 (9:16) Thank you. Speaker 5 (9:17) Let's get to some questions from our listeners about saving for retirement, because we know there are so many different paths to do this, and they're often not very straightforward. So here's our first question from Michael in Sacramento. They wrote, Greetings, nerds. I have a question about contributing to retirement accounts when you already are vested in a pension plan. Recently, my wife and I decided to invest more aggressively for our retirement. For her, it seemed like the obvious next step was to max out her 403B. We did that. However, for me, things are different. I work for the University of California system and invested in our pension. About 7 % of my paycheck goes to our pension every month. I always assumed that was enough. However, I recently realized I can also invest in retirement accounts through my work. I assumed it was one or the other. This makes me worry I've been falling behind. It seems like a good rule of thumb for relatively high earners is to max out your 401k or 403b. However, does that change for someone with a pension? Is there any type of framework or rule of thumb for us pension people? Is it overkill to strive to max out my 403B? Or is that like saving double for retirement? I don't need to be an all-star saver. I just want to feel like I'm doing what I should be doing. Thank you for your help. Michael from Sacramento. Speaker 2 (10:30) Michael is absolutely right that the math is different. when you have a pension and those people with a pension should consider themselves very lucky, but 7 % of your salary may not be enough. And so there's a series of benchmarks that I have used for years and they are aimed at making sure that you are accumulating enough. for retirement. They were developed originally by the folks at Fidelity. And essentially, they say that by the time you hit your 30s, you should have one times your annual income put away for retirement at 43 times, at 56 times, at 68 times. And by the time that you retire, 10 times the amount of your current income, which at that point will be higher, put away for retirement. And the goal of that money is to provide you with a stream of income that will cover about 80 % of your pre-retirement expenses in retirement. If you've got a pension, you don't have to hit the 10x benchmark. You can figure out what your pension will replace as far as that income and then back it out. In general, being on a trajectory of saving a total of 15 % of your income a year is going to get you to those places. So for this listener, I would add up what you're putting away, what your wife is putting away, what the matching contributions are kicking in, and see how close you're getting to that 15 % level and back out from there. Speaker 5 (12:18) When I talk with clients at my planning firm who have pensions, they get really confused about knowing how much they might even have coming in. There's a formula based on years of service and a certain percentage of salary. And so they try to wedge that into the percentage that they're saving, getting close to 15%. And just the numbers can be hard to grapple with. But I find that when people actually dig in, often working with a planner who has some software and some math on their side to understand what exactly they might be able to have in retirement and how that compares to their potential expenses, just that kind of clarity from knowing numbers can bring a lot of relief. Speaker 2 (12:52) I think that's totally true. And it's not just the numbers on how much you're going to have spilling off. It's what you're going to need or want to spend. And your cost of life. now is probably a