Rightsizing Your Life for Retirement

Christine Benz : Hi. I'm Christine Benz for Morningstar.com. One of the key challenges of managing your finances during retirement is determining how much you can spend without prematurely depleting your nest egg. Here to share some tips for doing that is Jeffrey Christakos. He is a financial planner, and he is head of Westfield Wealth Management. Jeff, thank you so much for being here today. Jeffrey Christakos : Thank you. Benz : So, Jeff, you work with a lot of people who are either retired, getting ready to retire, or evaluating their retirement readiness. I'd like you to talk about some of the key challenges that you see your clients facing. Christakos : Well, we've just experienced a serious economic downturn. So, a lot of the plans that have been put into place during the last 10 years are now challenged because the assumptions that were made aren't exactly accurate in the short term. Perhaps they are in the long term, but in the short term for those that were going to retire in the next couple of years or have already retired, the assumptions about values of homes and investments are not accurate. So it's caused a lot of distress and challenges for my clients. Benz : Right, and you mentioned to me, Jeff, that a lot of times clients look at what might be a shortfall in terms of their portfolio size or their overall asset level, and they try to maybe goose their return expectations. So they assume that maybe stocks will return 10% or even more than that, and that bonds will give them a helping hand. You have discussed with me that you think that that can often be a pretty negative thing to do or just not a realistic thing to do. Christakos : Right, that's because the returns that they're looking at are average rates of return. So let's say the stock market average rate of return is 9%-10%, but that's only 25% of the time. Most of the time it's either higher or lower. So if you are unfortunate enough to have to take a distribution when it's in the lower portion then you're not going to be able to recover when it's appreciated. So, retirees just assume that if they just increase their risk, they'll have higher rates of return, but it could actually be on a larger downswing point and hurt them even more than they understand. Benz : So, that's not an option, but with your clients, you spend a lot of time talking about right-sizing their financial lives. I'd like to talk about what that means first, and then I'm hoping you can share some specific examples of clients who have successfully gotten their inflows in-sync with their outflows? Christakos : Well, the first point is you have to actually take an inventory. So, what you have to do is take an inventory of your inflows, which are generally pension distributions, Social Security, a 4% or so distribution from your piles of money that you've accumulated--a lot of people think it's going to be a lot larger and that's assuming the money is actually invested--and maybe some part-time work that you're anticipating continuing. You have to take an inventory of your outflows. What are your required outflows? You have health issues. You might have some medical costs. You have food. You have shelter. You might have some things you never thought about. You might have promised a wedding. You might have financial obligations as a result of prior divorces. You might have children that want to come back and live with you. That is also an outflow requirement. Benz : And an increasingly common one, too. Christakos : That’s right. So, you have to take a real look--I'm the objective observer--of your inflows and outflows. You then compare it with what you have, what we call assets, what you can convert into cash. With your home, you can't look at it as a total conversion if you're going to live in it. So, maybe you can downsize your life and maybe take some equity out, but this option is not as available now after the real estate downturn. And then you look at your liabilities, such as how much your credit card bills are and what your other personal debt might be. You might have funded your children's education, so you still might have student loans, not yours, but someone else's. You might still have a mortgage on your home. So, you look at all of those and see whether you can produce the inflows that meet your current outflows or your projected outflows. <TRANSCRIPT> Benz : So you say that one of the key things to bridging a shortfall or helping remedy if there is a mismatch between inflows and outflows is really getting the clients to focus on what is important to them during retirement and for the rest of their lives. How do you help frame that conversation and get people thinking along those lines? Christakos : I try to get them to be mature. I mean, it's like you have children, who give you a Christmas list and they say I need this or I need that, and then you get down to what the difference is between needing and wanting. So, I get them to break down what they actually need in terms of food and shelter and all these things, and then match it up to the inflows, and see if there is an excess at all. If there is no excess cash flow, we then have to restructure their actual needs, and that is done through rightsizing, such as downsizing their home, changing the car they drive, or maybe going out to dinner less. There's a whole assortment of things that we can do to change the required needs if need be. Another example is cohabitation. Now if there is an excess of inflows over needs, we now can start dealing with the wants, and we then have other problems associated with the wants. Generally I’m dealing with couples, so each person might have their own wants. So, then we have a negotiation process--I’m an arbitrator in that case--to make things balance. Benz : You said in some cases, children might be in the mix too. They have their needs and wants from their parents, and so sometimes you sit down with them and talk about the reasonable expectations in terms of the financial help they might receive from their parents. Christakos : Right, I act as the financial gatekeeper. I often happen to represent the parents in negotiation--we call it--with their children because of the different economic cycles that the children might be going through versus the parents' overaccumulation in their eyes. I explain to them that the parents really need the money that they've accumulated to not be a burden on them. Benz : Right. So, Jeff, you mentioned some of the solutions that people can implement when rightsizing. You mentioned downsizing, and a few other things. I'd like to drill into some of the solutions that have worked for your clients. These are things that maybe people don't naturally think about when determining the viability of their retirement plan. Christakos : So, most people think in, what I call, cliff living. They live, and then, at 65 or whatever the projected age is, they are going to go into this world of retirement, which means a lot of different things to different people. So, one of the things I suggest is maybe you should have a blended life as early as possible in your life. Benz : What does that mean? Christakos : A blended life is picking a job or a career that you would like to do as long as you are healthy. It's a health-based living as opposed an age-based living. And I've done that myself. At 30 years old, I created an environment that I hope to continue as long as I am healthy. And that's just a great quality of life besides the fact that it doesn't require large pools of money to be set aside for the point when I'm not earning any money. So, that's a definite issue. So, I suggest for people to try to establish themselves and maybe a sideline along the way if they are waiting in a job so that that could take over when the job stops or something along those lines. Another thing that we talk about is cohabitation. That's a common thing to do. When you think about the end of the lifecycle, a nursing home is a common strategy; that's cohabitation. Everybody dwindles down their assets so they could fit into a small room or so in a nursing home. So, what we suggest is maybe ratcheting back your assets and giving your things away, such as free Craigslist offerings, so they could fit into a small space or a smaller space than they are in now. But if they can't make it economically, they might want to share a space. So, they might take a house and split it in pieces. That used to be done in the past; it probably will be done in the future with these big mcmansions out there. So, that's another way to do it. Benz : So, that's a solution that might not appeal to many people, some people perhaps. I'd like to talk about downsizing homes because I think a lot of retirees might be looking and seeing that their home is an asset that they could downsize to certainly have smaller living expenses. On the other hand, the real estate market isn't great. So, what do you do if you are someone who is in retirement or getting close to retirement? You might see this is a logical step to take, but on the other hand, you don't have a particularly hospitable market for selling your home. Christakos : Well, the question is not: "Is the house worth less than it was before?" The question is: "Is it worth less than it will be in the future?" So, if it's worth more in the future, you would hold it. Benz : Right. But "you don't know" is what you're saying. Christakos : Right. If you are not a seller, you are a buyer as we say. So for the concept of holding the house until it recovers, I hear that all the time. There is no guarantee it’s going to recover at any kind of reasonable pace. So now we are not dealing with stocks; we are dealing with a house. So if that’s the case, during your life cycle, if there is no tremendous recovery because of the unusual case that housing prices appreciate, perhaps resulting from interest rates coming down and easy money and things like that, now you can make intelligent decisions. So now the question is: "Would you buy that house again with your current life?" And if the answer is yes because you need all the space you have for whatever reason, that’s fine. If it’s no, then you have to take action. So what you do is you then take a survey of what rooms you actually use on a regular basis. In my old house that I sold a few years ago, I found that I used four rooms. So I had maybe an extra room or two, and that’s about it. Then you functionally see what you need and what you don’t need. Houses are now being changed where living rooms are no longer necessarily the same size as they used to be because people don’t use their living room. So the industry is moving that way toward the new homes. You could be very specific in your own life based on how many people live with you and what your individual needs are. Benz : Right. The last thing I want to cover you with you, Jeff, is you deal with a lot of clients, and I’d like to hear some of the biggest mistakes that you see people make. So, even after you have coached them on these various aspects of rightsizing their financial lives, what traps do pre-retirees and retirees most frequently fall into? Christakos : Right. So first of all, most people don’t have plans. If they do have a financial planner and they’ve agreed to go through the process, most of them don’t implement their plans. Why they don’t implement them is because they are difficult to do. It’s like saying you're overweight. If someone gives you a diet plan, you know that it’s going to work, but you have to actually go through with it. So, I think the first problem that people run into is that they don’t execute. If they execute, they execute too late. All of a sudden, they say "I give up. I now have to do something." It’s now maybe too late. So then they say, "Well all right, well I’ll just work a few more years, or I’ll ratchet up the risk pattern." So that, obviously, we spoke about, doesn’t work. Their option for working longer might not be available because the job that they thought they had might not be there anymore. So, I’d say not starting early enough is a problem. Even when they start, they have to be realistic. They have to be aggressive. They have to push themselves to actually to make the changes that are necessary. It’s nice to have a fancy dining room for when your family comes back to visit on the holidays, but you’d have to really figure out how much this dining room is costing you. You can go down the line. It’s difficult to process, but I spent a lot of time with the clients and tried to explain to them and work with them to get a unique financial life that matches their real life. It's a great empowering experience. It's hard for people to believe that if they give away all these items that they'll feel stronger, but it's a very empowering experience. I love to celebrate that experience with them. Benz : Well, Jeff, thank you so much for sharing all these tips and very concrete ideas. We very much appreciate you being here with us. Christakos : Thank you for the opportunity. Benz : Thank you for watching. I'm Christine Benz for Morningstar.com.