• Brian Portnoy
  • Shaping Wealth
  • The Geometry of Wealth (Book)
  • Diversification Always Means Having to Say You’re Sorry
• Why Most Retirees Will Never Spend Down Their Retirement Portfolio [Kitces Research]

5 Steps to Overcome Retirement Spending Challenges

This show is a proud member of the Retirement Podcast Network.

Taylor Schulte: Welcome to the Stay Wealthy Podcast. I’m your host Taylor Schulte, and today I’m talking about spending money in retirement. Specifically, Brian Portnoy, one of the world’s leading experts on the psychology of Money, joins us to discuss three big things. 

Number one, why it’s so hard for people to spend the money that they worked so hard to save for in retirement. 

Number two, what people can do to prepare for the well-documented retirement spending challenges that lie ahead. 

And finally, number three, how to use Brian’s four Cs to achieve true wealth. We also talk about the meaning behind Brian’s famous Diversification always means having to say you’re sorry and how it can help you make better investing decisions. To view the research and articles supporting today’s episode, just head over to youstaywealthy.com/231.

So Brian, according to research published by our mutual friend Michael Kitces, when using the 4% rule, retirees end life with more than double their starting wealth in 66% of the scenarios that he ran. 

In addition, he found that retirees using the 4% rule were more likely to end life with five times their starting wealth than end life with an amount smaller than what they started with. In other words, these popular withdrawal rules are very conservative in nature, and yet we both know that successful retirees with very healthy retirement plans are still challenged with spending money in retirement. 

So to kick off today’s conversation, I’d love for you to help break this down for us. In your opinion, why do you think it’s so hard for people to spend the money that they work so hard to save for in retirement?

Brian Portnoy: It’s such a good question, and those numbers are kind of mind blowing, aren’t they? I think there’s a few things going on here, Taylor. 

The first is that old habits die hard and there is in a very good way a discipline to saving that many people have built over time. And those habits are built over not months or years, but decades. And habits are these grooves that get formed in our mind and it’s kind of hard to get out of them, and especially when good habits get reinforced. 

So you hear over the course of your entire working life, well, I want to save for retirement. I don’t want to be a spend thrift. I want to make sure that I’m prepared for the future and to do a number of things that you want to do. 

And here’s the thing between, let’s just take a standard retirement age of 65. There’s really not a big difference between being 64 years old and 11 months and 65 years old in months. There’s no magic barrier. There’s no fireworks that go off, there’s no flip that gets switched.

You’re really the same person, but you’re sort of receiving the message that, well, now that you are retired, which is a kind of complicated, very historically specific concept to begin with, now that you’re something called retired, you should live your life very differently. 

And many people struggle with that. I would say most people struggle with that to say, I’m going to be a different person than I was now because I’ll bring up the I word identity. People identify with being a saver. It’s just not, I save, it’s I’m a saver because I’m responsible and I take care of others. 

And therefore, when you’re asked to start spending because you have a nice nest egg that you’ve built over time, it sounds like a good thing.
But you’re also being asked to go against your identity. That really just relates to mindset. We kind of have two lives as investors or two phases of our money, life accumulation and decumulation. 

So in the modern retirement system, you save a lot and then you’re supposed to spend it all or a good chunk of it. And that flip from accumulation to decumulation often feels pretty uncomfortable. And to go from one mindset to the next isn’t something that many people do very well. 

The last thing I’ll say in terms of why it’s so hard for people to spend in retirement is sort of the big, well, what if scenario. We think of that catastrophe, that one in a thousand, that one in 10,000 event where something really bad happens and boy, you better have that nest egg in good shape or else you are going to be in a lot of trouble. Those catastrophes very, very rarely happen, but it’s hard sometimes to escape that catastrophic thinking.

Taylor Schulte: I’m sure we can both think of people in our life who have done a great job being savers accumulated a very healthy nest egg who have also proven to be great spenders. You mentioned habits and behaviors and that these things, more or less, they stick with us through life. 

What sort of habits and behaviors do those people have that have done a great job saving and don’t seem to have much trouble spending that money that they work so hard to save in retirement?

Brian Portnoy: Well, that’s a good question. I don’t think there’s a clear answer to that. One thing that we see in our day-to-day of working with financial advisors and clients is that many retirees are scared to spend. That is sort of a big problem that not that many people speak about. 

For some reason it’s actually, I don’t want to say rare, but it’s less common than one would think of being able to be a great saver and to accumulate a very large nest egg. And then on the day after you retire, you’re like, alright, I’m going to start spending it all down. 

That’s a bit of a high-wire act. I think what distinguishes that group from those who are scared to spend is that they’ve done a pretty okay job at defining an abundant life. They’ve either have an intuitive sense or an explicit sense of what true contentment looks like or should look like, and they want to lean into that and they’ve maybe done a lot of work leading up to retirement that gets them there. 

Otherwise, you can get caught flatfooted and you remain scared to spend.

Taylor Schulte: I’m sure you’ve heard conversations or heard people in your life say something like, let’s say this person has $3 million, $4 million, $5 million, whatever it might be, healthy nest egg. And they say something like, well, if I had a $10 million nest egg, I would have no problem spending this money, but it’s only 5 million. It’s all relative here. 

What are your thoughts when somebody says something like that? Do you truly think if they had double what they had today that they would be able to spend that money or would they be faced with the same challenge?

Brian Portnoy: Yeah, the short answer is no. They’d be faced with the same challenge. That’s what we call sometimes then syndrome when this happens or if this were the case, then I would feel this way or then I would be able to behave this way. 

But that’s not really true. Most of the time I don’t have the specific citation at hand. But what is it that unquote rich people want when they get to the next level of being rich? Well, they want more. And so when you ask individuals who have a million dollars, what would rich be? It tends to be around 2 million. 

When you ask someone with $5 million what riches, they’ll say two x, they’ll say $10 million. And by the way, that keeps going and going and going into being a millionaire and a billionaire, that really never ends because we’re wired that way, Taylor, we are wired to always want more. Psychologists call that hedonic adaptation. 

It means that you’re happy until the point where you aren’t happy and then you search for more. One of my favorite quotes from one of my favorite shows, Mad Men, the lead character Don Draper said that happiness is the feeling right before you want more happiness. That’s the dynamic that is very hard for us to escape. Some do, but many do not.

Taylor Schulte: So most people listening can agree that spending in retirement is a challenge. Yes, I’m sure we know people that have done a great job saving and have no problem spending money in retirement, but for the most part, I think most agree that these spending challenges are well documented and most people feel them at this stage of life. 

So I’d love to segue here and talk a little bit about what people can do in advance of retirement. Let’s say someone is within five years of retirement, they’re listening to this episode right now and they’re saying, yeah, I understand. I know it’s going to be challenging for me to spend this very healthy nest egg. 

What can they do ahead of retirement within those five years to prepare for this well-documented challenge?

Brian Portnoy: Yeah, it’s a great question and I think of this in maybe five steps.

The first is to acknowledge and normalize the condition. It might sound strange because a lot of Americans are not in the most financially healthy shape and we’re talking about folks who are in really good shape and they’re having a different problem, which is that they’re going to pass at some point with a very, very large nest egg, which might be an attractive outcome. 

Nonetheless, there is the opportunity to spend on a whole variety of things in the here and now. And so leading up to that, if you really are a saver, if you’ve spent decades socking away into your 401k or some other sort of retirement vehicle, you can start with just acknowledging that this is real, that it’s actually quite normal. 

I think generally from a psychological point of view, the more we normalize behaviors that we might think are abnormal, the more we can transcend them.

The second step is to just do the math. And it’s actually better when you do the math with a trusted guide or an advisor or someone who’s really taken the time to get you, because there is something about the clarity of the numbers that do help a fair number of people. I think one of the hardest parts of both giving and receiving financial advice is just clarity and transparency over what’s owned and what’s owed. And once you have that transparency and clarity, it can be a lot easier to make decisions. 

The third step that I would flag is given that you’ve acknowledged the challenge that you’ve done the math, you step back and you define what is contentment or what is an abundant life and that’s fun. Or at least it could be fun because you can begin to think out loud about the things that are truly meaningful to you.

And by the way, that’s just not taking a luxury cruise. That’s just not buying a vacation home. It just could be more time with the kids or the grandkids. It could be charitable giving, it could be anything that’s important to you, but defining your abundant life, not what society says is important, but what you think is important. 

So the fourth step is explicitly giving yourself permission to do that, even writing it down saying, these are the things that are important to me and these if not an exact dollar amount, these are the sorts of things that I want to spend money on.

And then lastly is just practice leading up to that retirement date. You think you want to retire at 65, so starting at age 60 or 61 or 55 or whatever the age is, you lean in, you start spending on that abundant life now instead of later, and you form those new healthy habits where you really are achieving a contentment that you might not have otherwise.

Taylor Schulte: You mentioned do the math and having clarity of numbers, I certainly agree there’s some benefit to doing that. One of the exercises that we’ll often go through with clients is really shocking their plan. 

The big worry is like, what if this big event happens? What if it’s a major long-term care event? Or what if the market returns are substantially lower than we assume they would be? And so one of the exercises that we found to be helpful, and I’d be curious to hear your thoughts on it, is it’s really shocking the plan. 

What if we do go through this extreme event? What happens to your plan? What is the outcome of that event or events for that matter? And if that were to occur, how would we recover from that? What steps would we take that might be different than what we had planned on? What are we going to do in response to that event or those events to ensure that our plan doesn’t break down and we don’t put our plan in jeopardy? 

So I found that just shocking the plan for those extreme events so that, and when it does occur, we have a plan of action that we can take to respond to those potential events in the future. I’m curious if you think that that is a worthwhile exercise to go through in any additional thoughts that you might add.

Brian Portnoy: Oh, a hundred percent. I mean, that is sort of the best expression of smart financial planning. You go through those what if scenarios, you think about what could go wrong and then you plan accordingly. 

It’s not necessarily healthy to think every day that the sky is falling, but it’s at the same time very healthy to kind of write down some things that might not go, maybe there is a health scare, maybe there is some disruption to the economy and hey, can we come up with a plan ahead of time so that when those things do transpire, you can say, well, you know what, we’ve thought about this. 

Let’s go to what we wrote down, whether it was a year ago or 10 years ago. And there’s something comforting in and of itself to go through the process where you’ve thought about these things and then there’s something very useful in the moment where, well, we made a plan. 

Now there’s probably a decent chance that exact plan isn’t exactly right for the moment, but you’re probably directionally correct. So sort of scenario analysis, what if thinking and not just thinking, but planning. 

Taylor Schulte: I mean, that’s really good stuff. That in and of itself should give people a fair amount of comfort. So hopefully this is helpful for somebody who’s nearing retirement within five years, taking some steps now to prepare for this challenge of spending in retirement. 

What if you’re already in retirement? What if you’re in the middle of retirement right now and you’re like, I started retirement with $5 million, very healthy plan. I still have $5 million. What actions can I take when I’m in the middle of retirement to overcome this fear of spending and start to enjoy life? Is there anything different that that person can do versus that person that has some time in advance to plan and prepare.

Brian Portnoy: Yeah, I don’t really draw a sharp distinction between the person in retirement or versus near or approaching retirement. Again, it’s not like there’s some magic gate that happens on the day that you leave work for the last time. I mean, one of my favorite lines from social psychology is that human beings are works in progress, who mistakenly think they’re finished even in your sixties and seventies and beyond. 

We’re evolving and we have interests. We gain new interests, we gain new relationships, things happen. Life is constantly changing in a variety of ways, some good, some not so good. 

So whether you are 70 years old and retired or 55 years old and thinking about retirement, the steps that I articulated before I think still hold true. Acknowledge that the difficulty of spending is a normal thing. Do the math, the math. Is the math regardless of your age or stage of life.

And then lean into your definition of what an abundant life is and see if you can begin to indulge that. So rather than just doing things on the fly, stepping back and asking, well, what’s really important to me? What are my underlying sources of contentment in life and how can I participate in those? 

And with the types of retirement plans we’re talking about right now, there’s probably a decent chance that you can afford to do some things that are truly meaningful to you. And it doesn’t mean that you don’t leave a legacy. Some people think, well, I don’t want to spend a dime now because I want to leave it all to my kids. 

Well, obviously that’s your choice, but it’s probably a question as to whether that’s what your kids want from you. But there’s also a question of, well, what can you be enjoying right now and what are you trying to achieve?

Taylor Schulte: You’ve coined this term funded contentment, it’s something that we’ve never really discussed here on the show. I’d love for you to share more about what funded contentment means and how it relates to this spending challenge in retirement.

Brian Portnoy: Yeah, it’s directly related. So I wrote a book a few years ago called The Geometry of Wealth, and the subtitle of that book is How to Shape a Life of Money and Meaning. 

So in other words, where does money fit into a meaningful life? And I think it was literally page one of the book. I said, look, there’s a difference between being rich and being wealthy. Rich is the quest for more, and I alluded to this earlier, when you get more, the next thing you want is even more. It sort of never ends that treadmill. Wealthy is the other fork in the road. 

And to me, true wealth is what I call funded contentment. And specifically, that is the ability to underwrite a life that is meaningful to you. So funded, contentment or true wealth is the ability to underwrite or afford a meaningful life, however you choose to define that.

And however you update that through life’s ups and downs. And I’ve found that people find that concept to be very handy because it anchors on contentment, not day-to-day happiness, and that’s a real thing, but that’s a wake up and you’re in a good mood or you’re in a bad mood, but sort of a deeper sense that you’re living a life of purpose, that your life has meaning. 

And there are some, I think there’s a handful of sources for that contentment or meaning, but thinking about those things first before you think about money and then asking, well, can I afford the things? Can I underwrite? 

Whatever those of contentment are, it’s actually a relatively simple but nuanced tool or mindset that you can use at any point in your life, but maybe especially approaching or in retirement when you’re asking big questions about, well, what does this all add up to?

Taylor Schulte: You’ve documented these four underlying sources of contentment and called them the four Cs. I’d love for you to talk to us about the four Cs, what they are, and just kind of a brief overview of each one, how it relates to retirement and again, spending in retirement.

Brian Portnoy: Sure, happy to and I want to make reference if there’s an old line from scientific research that says that all models are wrong, but some are useful. And I find this model useful, and it’s based on my own journey, my own personal reading of economics and psychology and philosophy and theology and lots of other things. 

To me, there are four sources of underlying contentment in life, and I call them the four Cs, connection, control, competence, and context. And in short, each of those is connection. We have a deep-seated need to belong. We are truly social creatures. The tribe, small T tribe is everything to us. 

And so right now, there’s lots of evidence to show that we’re in a global epidemic of loneliness. The irony is that we have social media that we’re all participating in, but we’re also feeling quite isolated. So our sense of belonging to a community is incredibly important. Relationships matter. 

The second C is control, and it’s sort of the flip side of the coin. On one side, you have connection with control. It’s autonomy, it’s freedom, liberty, opportunity. It’s your chance to basically do what you want with your life. And that sense of having control over not only what you’re going to do, but the story that you tell about where you’re going is very meaningful to us. 

The third C is competence. And that is kind of a reference to the work that we do. Work is deeply meaningful to all of us, and it could be your job, your vocation, your hobby, something that takes up a lot of your time that kind of in part defines who you are. Think about Taylor. When we go to parties, when you go to a party, the first thing that often people ask you is what do you do? Or what did you do? 

And frankly, no one really cares what you do, but they want to know who you are. They want you to sort of identify yourself in part through your chosen occupation. So what we’re good at defines in part what’s meaningful to us. 

And then the fourth C is context that’s referenced to the idea that those who live for something beyond themselves tend to lead more meaningful lives. And historically it’s been sort of two things. One is faith, and the other is place. 

So whether you call it religion or spirituality or faith, but some sense of where you fit into the broader cosmos is one thing. And then place is the other thing that attaches us to something bigger than ourselves, and that’s hometown pride or your patriotism or love of country, things like that. 

So all in, we have kind of a really rich framework, these four Cs that define the meaningful life that is step one to achieving funded contentment. And then step two is the funded part. Can I afford the things that are meaningful to me? And lo and behold, whether you’re 35, 55, or 75, there’s a decent chance that many of the things that we cherish the most don’t cost much at all or might even be free.

Taylor Schulte: You also talk about the seven dimensions of money and how the four Cs intersect with these seven dimensions of money. I don’t know if you want go through all seven dimensions of money or maybe just share a couple of examples here of how these four Cs intersect with these dimensions.

Brian Portnoy: Sure, yeah. I don’t want to end up giving a lecture to your readers, but I do think about what I call money life. And I would encourage everyone to think about their money life and the fact that it’s just not about swiping your credit card or paying the mortgage or those activities, but there are these seven domains of our lives that are financial, that are quite distinct in terms of the behaviors that we go through.

And frankly, even the neuroscience neurochemicals fire a little bit differently for different parts of money life, we feel differently about them. And what are those? Those are earning, saving, spending, borrowing, protecting, investing, and giving. And each of those is a separate field. 

I’m positive of you as a very skilled financial advisor. You’re working across all seven dimensions of money life with your clients, and each of them is an opportunity to make good decisions and each of them in their own way as a pitfall where you might make some bad decisions that you need to retreat from.

The thing about the intersection of those dimensions of money, life and the four sources of contentment is that we can begin to think about how we find meaning in the things that we do. 

So really easy example that’ll be meaningful to everybody is that you think about the seventh dimension that I listed, giving or generosity or being charitable, that is a distinct human activity. That idea of being altruistic, of giving to others versus giving to yourself. And then think about the fact that sometimes you want to give to your community, and that’s going to draw you closer into the people that you really care about. In other cases, that giving is going to intersect with what I called context, that sense of something bigger than yourself, whether it be your hometown pride, your patriotism, your religion, or your faith. 

So when we begin to think a little bit more specifically about all the differences in which we engage in this kind of weird, relatively new invention called money, there’s so many cool opportunities to begin to think about the lives that we want to live. And whether it’s on your own or with your partner or an advisor or a trusted friend, there are lots of opportunities to elevate.

Taylor Schulte: As we round out this conversation. I want to switch gears a little bit here. Longtime listeners have heard me share a quote of yours many, many, many times, and that quote is, diversification always means having to say you’re sorry. I have a lot of thoughts on this. I’ve shared a lot of my thoughts on this quote. 

I’ll just leave it with where did this quote come from, in what context, and what do you mean by,

“Diversification always means having to say you’re sorry.”

Brian Portnoy: Yeah. I chuckle because I wrote this and said this maybe 10 or 12 years ago, and it’s probably the most quoted thing that I’ve said, even though I think I made it up on the fly. 

So the short of it is that I started my career in financial services on the investing side of the business, investment research, portfolio management in traditional mutual funds and alternative hedge funds and different markets.

And along the way, helping investors build portfolios that help them achieve their goals so that they can afford the things that they want to in life, not just in retirement, but in the near term, medium term and long-term. 

One thing we know as unquote professionals is that the orthodox belief is that you should have a diversified portfolio. Just the classic idea, don’t put all your eggs in one basket if you put all of your assets in stocks versus bonds versus real estate versus whatever the asset class is. 

Maybe I’m not giving any form of advice here, but maybe you’re taking risks that you don’t want to. So we diversify, we spread our bets around. I think people find that very intuitive. The thing is that if you diversify, and by the way you should diversify, it means by definition that there will be laggards in the portfolio. 

Something will zig, something else will zag, and so something’s doing well and something’s doing less well either on an absolute or a relative basis. 

And the investor behavior that I’ve observed over 25 plus years now is that the thing that underperforms is the thing that the individual investor or the client or the financial advisor gets upset about and they get frustrated with themselves or they call their advisor and say, Hey, why did you put me in something that went down? 

And so we get to the line that diversification always means having to say you’re sorry.

There’s no getting around the fact that if you diversify across asset classes, which is the smart way to approach a portfolio, that’s something’s going to underperform. And speaking my own book now we are our own worst enemy when it comes to building portfolios that last. 

And so getting upset over the fact that something almost by mathematical definition went down or underperformed, is a sure way to make us maybe want to sell our portfolio at the wrong time or exit an investment that is just going through its normal course of volatility. 

So it’s a quote that clearly has landed in a lot of places over a long period of time, and I’m glad that it’s out there because it does inspire good conversations between clients and advisors over what is the psychological dimension versus the mathematical dimension to diversification.

Taylor Schulte: You just mentioned talking to your book, and before we wrap up, I’d love for you to literally talk about your book, the Geometry of Wealth. It was published several years ago, but it’s still extremely relevant today and especially relevant to today’s conversation. 

So I’d love for you to give us just a quick high-level summary of the book and what you hope readers take away from it.

Brian Portnoy: Yeah, sure. So can’t believe it’s published in 2018, so it feels like forever ago. It sort of is forever ago. So the geometry of wealth, how to shape a life of money and meaning, and I’ve mentioned kind of the main thesis, which is that true wealth is funded, contentment, the ability to underwrite a life that’s meaningful to you, however you define that. 

And there are four sources of underlying contentment, the four Cs that we mentioned, and then well, how do we achieve funded contentment? That’s kind of the bridge to my connection to the world of financial planning. 

To me, there’s a three-step process. We define our purpose and then we set priorities, and then we make decisions and life it’s around world. So that process just becomes iterated over and over again. It’s sort of a top-down, what’s really meaningful to you, so define your purpose, and then within that context, where do you want to take risk and where do you want to be conservative? So you’re setting priorities. 

And then the third step of, okay, there’s a whole variety of decisions to make across those seven dimensions of money life. It’s sort of a pocket-size approach to financial planning that I think clarifies what everybody is trying to do. I think many investors, many financial advice clients are asking one big question, which is, am I going to be okay? 

And in one way or another over a decade plus now, I’ve been trying to come up with different good answers or at least conversation starters to sort of address that foundational question.

Taylor Schulte: I’m glad you mentioned that. Am I going to be okay? I was kind of thinking about that earlier when we were talking about preparing for retirement and how to overcome this challenge of spending a retirement and crunching the numbers and doing the math. 

I think it shows that financial planning is fluid, that you can be given this answer that your plan is healthy, you’re okay one day, but then a month later or six months later or 12 months later, you’re wondering, am I still okay? And oftentimes as a financial planner, what we need to do is just keep telling the client that they’re okay, that oftentimes they don’t need more number crunching. They need you to tell them with confidence that they’re okay. 

But it does bring up the challenge of this kind of one and done financial plan. Here’s your answer, head into retirement and you’ll be fine. Because I think, and I know people continue to find themselves wondering and questioning, am I still okay? Right. 

Markets have moved in different directions or monetary policy has changed. Am I still okay? So that comment of you’re okay, I think is really powerful.

Brian Portnoy: Yeah, it’s never one and done, and I’m sure you do this as well, distinguished noun versus verb plan versus planning. I think the best advisors and the clients who are most likely to achieve broad success in life, they embrace the verb planning. And then the next verb that’s important is adaptation or adapting. 

There’s just no getting around the reality of life that things change and forget the fed and monetary policy, that stuff, we’re terrible at predicting those things. What happens more importantly is life, kids, grandkids, sickness, geopolitical, turmoil. 

There’s a whole variety of things that take place that just define the lives that we live. And the joy of it all is being in a position where you can hopefully start first and foremost with what’s most important to you. That’s what you control. Those are the pillars that you lean on. You don’t lean on your guess as to whether the fed’s going to cut 25 basis points.

I mean, honestly, who cares? What’s really important is the four Cs. What is your sense of belonging? Who is your community? What control over your life do you have autonomy? What are you really good at that you love doing? And what’s your attachment to the broader world, whether it’s faith or place or the environment or something else? 

Those are things that you can really invest in, which is just a matter of time and conversation. And then from there, you can build a plan that you know is going to be out of date within a day or a month or a year, but then you rewrite it. That’s okay, because you have your pillars that are supporting you along the way.

Taylor Schulte: I can’t think of a better way to end this conversation. Brian Portnoy, thank you so much for joining me on today’s show. We’ll be sure to link to everything in the show notes, including your book. Really, really, really appreciate you coming on.

Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.