Hi, I'm Warren Berger. I'm the owner of luminary financial advisors. And today I wanna talk to you about the question that I'm asked most frequently by my clients and that's, when can I retire a super simple question with a couple of complexities when it comes to the answers. So we're just gonna go through some of the things that I think that you should be thinking about as you approach retirement. So the first thing that I have to do is just let you know that this is not considered to be investment legal or tax advice. Just really take this and, and, and use it to move forward, but run it by your account and your attorney or your financial advisor to make sure it's it's right for your specific situation. If you're gonna, if you're gonna use any of the things we talk about here.
So so how do we think about retirement? I, I like to break it down into three sort of main facets when you're considering when you can retire. So number one is longevity. How long are you going to live? We have to have a sense for how long we have to plan out the amount of money that you have available to you. Super difficult question. We're gonna get into that in a second. Also, what are your expenses? You're anticipated the expenses in in retirement and, you know fortunately it, it's kind of easy to get a gauge on number one, you kind of know what you spend your money on in general, but there's also some pretty main things that most people spend on. And so we'll get into what that kind of looks like as well. And then also what are you gonna income source is going to be, so, you know, we're gonna look at sort of reliable income streams and then things that are kind of moved with the markets and things like that.
So first thing I wanna talk about, and it's probably the most difficult thing to plan for, and, and maybe the most important is longevity or how long you're going to live. And we refer to that as longevity risk, and that's the risk that you're actually going to outlive the amount of money that you have available to you. And I think it's the biggest fear that most people have when they enter into retirement, because, you know, you're not working anymore. And, and your ability to get back into the workforce is gonna be limited if, if, if not there and certainly not desired. And so you have this finite amount of resources available to you and you have to make sure it lasts. So how do we think about that? I think the first thing we have to look at is what is your family history you know, ha have there been health conditions that are sort of genetic that you may be looking at as well?
Did your family live to a ripe old age and can you expect to do so? Like they did also, do you have specific health factors that have been entering into your life that could end up affecting, you know, how long that you're gonna be around. And so it's a tough conversation to have, it's a tough thing to look at, but we have to get a sense of that, you know, is, did, did the people in your family live until they were 75, 80 years old, or where did you have people that were living into their, you know, their late nineties to a ripe old age? You know, they're just things that we have to consider and then have the flexibility with your plan as you move along to adjust. So, you know, if your initial plan was going to be, you know, planning out until 85 years old, and now you're at 75 years old, well, now we're probably planning for 90 you're 95.
And so we're gonna adjust that plan as it goes. So there's a really good chart here that comes from Putnam that basically just lays out. If you see on the left hand side you know, at, at age 65, obviously you're at age 65, so you have a hundred percent chance of living and then just, you know, where it goes down the line. And you'll notice that there's a real drop off 68% to 49%, right around that 80 to 85 level. And that's kind of 83 or so is where the average lifespan is for somebody that's 65, but you can see that there's a, there's a statistical significant number of people that are living the 85, 90 years old. So that's something that you're gonna want to consider as you move forward. So let's move on to expenses. So what are your, what are your expenses going to be when you get into retirement?
And so there are some things that are pretty consistent with that. And, you know, these are the, the statistically, the top five expenses that you can expect in in retirement. And they're not surprising, right? It's, it's the things that we all deal with. But I wanna talk about each one, just a little bit just to get your head around how these things might change in retirement, because, you know, we've been so programmed throughout our, our, our time as we've been accumulating money that we're saving, we are saving for retirement, we're saving for kids college. We're also trying to live the life that we wanna live, but now as you get into retirement, a lot of those things are behind you, and you're just really getting into the things that are most important to you. And so and, and so you have to kind of get a sense of what that might look like.
So let's get into sort of housing. How do we look at housing pretty simply, you know, do you think you're gonna stay in the same house or, or or apartment that you're in throughout your retirement? If, so you probably have a really good sense of what the costs are involved in that, and that's great. And so you can start from there, but for some people, they look as they get into retirement to sort of downsize, right. You've had the big house with the kids, they're out of the house. You're making changes downsizing not only the house or sometimes where they plan on living to a an environment or a state that's a little bit cheaper than where they're living now. That's gonna, that's gonna provide for more money to be entered into your retirement plan.
So that's a factor. Some people get into retirement and they say, Hey, I I'm gonna downsize, but I also want to get a vacation home. So we have to weigh the cost of that and how it's going in fact, so, you know, just getting a handle on what those expenses are gonna look like, and if you've had these bucket lists, and now it's the time that you're gonna put them into play, let's get a real handle on, on, on what those are gonna cost. So then transport is the next one. And that's really just your car, your insurance things like that. But you know, how often do you get a new car? Are you leasing a car? Are you the type of person that likes to get a car every five years? Or are you somebody that sort of runs your car into the ground?
Like I do, and you'll keep it for 10 years and, and and, and, and then get onto the next one, but you wanna end up budgeting for those times where you're gonna need extra cash to sort of either purchase a car, lease a car, or, or whatever it is that you're gonna use to transport. Maybe you're gonna live someplace where it's mostly walking and you go from two cars to one car just things to start thinking about as you get into retirement healthcare. This is a big one. So are you retiring before age 65, right? 65 is the age at which you get Medicare. And so you know, if you're someone that's looking at retiring at 60 or 62, you know you have to figure out what healthcare is gonna look like now. If you're leaving an employer, you might have access to Cobra, and maybe that covers a portion of the time that you have to get your health insurance.
Otherwise you're probably gonna go to the affordable care marketplace and which is probably the most efficient way that you can get your healthcare, but there's, there's things that you have to consider with that as well. So there's tax considerations, there's certain tax cliffs that happen. If you have a certain amount of income, that income could actually come from your IRA as well. So you have to be aware of sort of the tax consequences, that consequences that might be there when you're getting your private health insurance. And then at age 65, you're looking at Medicare. But you may want met a gap plan as well. So to cover some of the gaps that you have in Medicare, what's that gonna cost? So, you know, getting a handle on these things right now, the average healthcare cost for people in retirement is the average is about $5,600 a year.
But that's the average and depending on what your health situation is or how you, you know, what kind of insurance you want, that could be much higher as well. So you you're really gonna wanna get a handle on that. And then there's long term care. So there's the healthcare that you have throughout most of your retirement. And then you really have to factor in what happens generally towards the end of life. If you're in a situation where you need to have in-home healthcare, or you need to be in a facility that can facilitate your healthcare cost of that, right now, average in the United States is $56,000 with 5% inflation, at least. So those long term healthcare costs are gonna add up and they need to be part of your initial plan for the back end. And so whether it's, you're looking at insurance for that, whether you have the resources to self-insure or looking at some of the other resources out there, you're just gonna wanna get a sense of what those costs may be down the line.
And then I think the last two kind of go together, right? It's food and leisure. And the reason food is so high on this is I funny enough, but it, it really makes sense. They say, when you're in retirement every day is a Saturday, right? So what happens on Saturday? You, you might go out to dinner, you might have a couple of drinks, your food costs tend to go up a bit when you get into retirement. And a lot of that has to do with the fact that you're going out to dinner more, and you're just going out and enjoying your retirement which goes right along with leisure, right? Activities. Are you taking cruises? Are you taking more vacations? Are you finally getting to do some of these bucket list items and hobbies that you've always wanted to do?
There tends to be a little bit of a, a increased cost that that sort of goes against sort of the cost that you've had in working. So you know, we tend to see costs are about, we start with a about 80% of what your pre-retirement living expenses are in total. But you'll see a larger proportion of your spending on leisure activities and going out to dinner than you did have before. So it's just something to keep in consideration. So once you get a handle on those expenses, now you can start to look at what your income income sources are. So let's take a look at that. So I like to break this down into guaranteed income and then your non guaranteed income. And I like to pair these sources of income with certain kinds of expenses. So I look at sort of the things that are absolutely necessary.
So your housing utilities having a car, these kinds of things, I like to pair those with your guaranteed income. And so the sources for that might be social security or a pension, if it's available, increasingly people don't have access to, to pensions. And so you know, if you have one and you're fortunate, that's great, you compare that with social security. Some people either have annuities or interested in purchasing annuities as sort of a, a way of, of ensuring, right. And you're paying for that insurance. So there is, you know, you, you are paying a premium to be able to have access to secure funding through your retirement. And so some people might get an annuity that sort of covers any gaps they have in sort of those expenses that are, are those non-discretionary expenses, the, the ones that you don't really have much control over.
And then sometimes you'll see for people in certain situations that a reverse mortgage can be used usually later on in retirement, if you're seeing that funds, aren't necessarily there to cover you towards the end. And also you'll see reverse mortgages used in some instances to fund those long term healthcare costs that may come up. But that's really kind of situational. I think in, in, in most cases, I don't like to rely on a reverse mortgage because you don't really know what your home is gonna be worth down the line and what that equity is going to be. But it is there and it is something that you can tap into if needed. And then when we talk about the non guaranteed income, those are your 401k 4 0 3 B 4 57 S U TSP. Any IRAs that you have both Roth and traditional and stocks, and then other, you know, cryptocurrency some real estate investments, you know, things like that.
So you know, that non guaranteed income, I, the way I like to start looking at your retirement is saying, okay, so what are the non-discretionary expenses? The ones that have to be paid and try to pair that number with your guaranteed income source. And so if you have guaranteed income, that's gonna cover all of that. Great. Then we look at that sort of non guaranteed, the sort of market based income sources to fund your leisure activities, your, your, the fun things, the discretionary things that are really, that are sort of the heart of, of a, of a, a satisfying retirement. But in a lot of cases, we find that the guaranteed income doesn't necessarily cover all of those costs of the, the non-discretionary expenses. So that's where we start factoring in, okay, how much of this non guaranteed income are we gonna need to cover the difference?
And then what are the discretionary, what are these bucket list items? What are they gonna cost? What are the anticipated costs of these things? And does it make sense? And so how do we look at that? We don't know how much the markets are gonna give us over time, but we can estimate based on what's happened in the past. And so one school of thought out there, it's a rule of thumb that maybe you can start with. It's really imperfect, but I'll, I'll give you a sense of it. And they call it the 4% rule. And it's basically based on research that was done in 1994 that based that they looked at the worst 30 years in the market. And if you had, during those 30 years invested in a 60% equity, 40% bond portfolio you could take out safely, take out 4% of your nest egg in order to in order to safely go 30 years into your retirement.
So someone at 65 year years old would be able to last until 95 years old on 4%. So it is a rule of thumb, and it's a, it's a way that you can start. And so you can turn around and say, okay, what are my what those fixed expenses that I have versus the guaranteed income look at what the gap is, and then say, okay, how much do I need to generate per year? And also with that 4% rule you can each year increase that 4% by the rate of inflation. So you are, you know, you, you are able to inflate the amount of money that you're taking out. So you can take that 4% rule and then come up with a, a, a general idea of, you know, how much of that your nest egg, you can be spending, and then sort of tailor that to what your anticipated expenses are.
So it may be that, Hey, there's plenty of money to do everything that you want. Sometimes there's even situations where actually quite often, where there's what you expected to be spending, there's actually more money available. And so you can look at either taking more vacations or doing more bucket list items, or you can be looking at leaving a legacy for family, children, grandchildren, that kind of thing. But let me just tell you a little bit about where the 4% rule has its limitations and, and it really needs to be factored in, and that's why it's a real general rule of thumb, but it, you know, a place that you can start you know, this was done based on a 60%, 40% 60% equity, 40% bond portfolio. It didn't take into consideration taxes. So for instance, if the majority of the money that you have available in, in the, in sort of market funding is in an IRA or a 401k, that money is gonna be taxed at income rates.
And so you have to sort of strip out what it is that you're gonna be intending to pay in taxes and know that that's the money that you have left over for that 4%. So, you know, 4% in that case could end up looking like 6%. So you, you, you know, you're really gonna have to figure out where, where the money is coming from from a tax perspective. It's also, you know, we've, we've looked at some of the returns on bonds over the last 10 years. And, and some people that have done some research have said, Hey, that 4% may be too aggressive in certain situations and, and said, Hey, we might wanna look at 3%. So it really, I, I, I go back to this idea that you have to be flexible, so you could start with 4% and say, Hey, how does this look?
How does my spending look, am I spending as I anticipated, am I spending more are the markets sort of cooperating in the way that we would like them to be, or does it make sense for us to scale back on our spending a little bit in a down market? And then we can increase a bit in, in a, in a market that's moving up. We call that guardrails and that's for another conversation, but I think you get the point here. It's, it's, the, the formula itself is fairly simple. Just look at how long you expect to live. And by the way, there's a great website for that. It's called living to one hundred.com and it's the, the, the numbers 100 in that living to one hundred.com and you can go there and there's a longevity calculator. It takes about 10 minutes and they ask a few health questions, but it'll give you a, a fairly good sense of, of, you know, how long you can be expected to to, to be around. And, and that might be a good place for you to start go through your expenses like we discussed separating them into your sort of fixed expenses and your discretionary expenses. Look at what your look at what your income sources are, try to match those income sources with those stable income, with the with the, the expenses that are most important, and then tailoring the the market based resources with the expenses that are going to be discretionary, that you have a lot of control over. And then looking at
Maybe that 4% rule is a starting point, but really trying to get, you know, nail that down as much as you can each year to see if that 4% rule is actually making sense in your life. So just a place to start on, on how and when you can retire. I, I hope this is something that's been helpful for you. Please subscribe to our channel if you wanna see more of these videos and and thank you very much for listening.