A Look at Consumer Spending, Credit Card Companies, and Las Vegas' Sphere

In this podcast, Motley Fool host Ricky Mulvey and analyst Nick Sciple discuss:

• How consumer spending held up as the economy cooled.
• Credit card companies benefiting from a shift toward experiences.
• The business behind the dramatic new venue, Sphere.

Plus, Motley Fool personal finance expert Robert Brokamp interviews Roger Young, CFP and thought leadership director at T. Rowe Price, about the company's research on retirement spending.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 3, 2023.

Ricky Mulvey: A lot of companies are talking about a tighter consumer but what's the data say? You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Nick Sciple. Nick, good to have you back.

Nick Sciple: Great to be back here with you Ricky. I've been out on some leave, spending some time with my new baby and it's great to be back with you. Obviously, love spending time with the family but it's nice to be back in the saddle seeing what's going on in the stock market. It'd be nice if the numbers would go up a little bit more but we'll see how things go.

Ricky Mulvey: Yeah, well, I'm sure your spending has changed and so has it changed for a lot of consumers. Americans spent 6% more in August compared to last year, growing 2% faster than inflation. On these earnings calls, you hear a lot about a tighter consumer, macroeconomic headwinds. How should investors digest this data?

Nick Sciple: Well, there's certainly concerns about macroeconomic headwinds on the horizon. Think about student loan repayments beginning this month. But when you look at this consumer data looking back at August, I'd say don't let a month or two of data let you see a trend that isn't necessarily there. There are some idiosyncratic things going on in the market that I'm sure you have heard about believe it or not, Taylor Swift has been on tour this summer, Beyonce as well and that might sound a little trite for me to bring up here but I'm not the only one mentioning this. You've had economists at Danske Bank blamed Beyonce for surprisingly high inflation back in May because she began her tour back in Stockholm. Federal Reserve economists have called out Taylor Swift's impact on the economy when it comes to lodging travel, that thing. The Eras Tour alone expected to impact the economy by over $5 billion. Traditionally, you see about every hundred dollars is being spent on live performances trickling into another $300 in ancillary local spending, think about you buy your outfit, you buy your hotel, things like that. You're seeing spending on these tours run even higher. However, these tours came to an end in August so these impacts that we've seen over the past couple of months, abnormal spending that I'm sure you may even know a few friends in your life, Ricky, that have spent ungodly amounts of money on some of these tours, it's not going to repeat going forward and we have some new idiosyncratic things taking place, as I mentioned, with student loan payments so I think the tighter consumer still on the horizon and we have some unique things going on that's driving some of this data.

Ricky Mulvey: Well, and part of it, it's not just Taylor Swift, not just Beyonce but it's this preference toward experiences especially after the pandemic. Airbnb growing revenue at an 18% clip in its latest quarter. Ticketmaster sold more tickets at a similar clip for the first half of the year. With this preference, are there any companies that you're watching that may benefit from this boost, this preference toward experiential spending?

Nick Sciple: I would say, looking at investing today, it's really the credit card companies. The companies that have maybe financed some of this spending over the summer that I think would be the beneficiaries today. To the extent, you see folks carrying higher balances. You can think about your live nations of the world and folks like that but remember, these tours have come to an end. Now it's time to go see the movie and so some of these impacts we've seen in the past couple of months aren't going to repeat until we see the next summer concert season come around next spring.

Ricky Mulvey: Well, speaking of spending on concerts last week, the band U2 opened up the Sphere in Las Vegas. It is a concert venue with the largest LED screen on Earth. I would encourage everyone to watch the videos of it, difficult to describe on a podcast, but it's basically a 20,000-capacity theater that looks like it's inside of a planetarium. There is a business behind this that is publicly traded but first, Nick, what were your reactions to seeing this opening, the videos, and the hype around it?

Nick Sciple: Just amazing first and foremost, it's like watching something right out of a sci-fi movie. I'm sure folks have seen there's a video of a larger-than-life eyeball that you see up there. It looks like something you might have seen in Blade Runner. My high-level thought is, you hear people oftentimes say we don't build pyramids anymore, we don't build cathedrals, and I would say yes, we do. The largest spherical structure ever built in the history of humanity now exists in Las Vegas they're doing it and you can invest in it.

Ricky Mulvey: Yes, you can invest in your very own Death Star possibly, too. The Sphere is a publicly traded company. Sphere Entertainment Group, which is a spinoff of the Madison Square Garden Group looks like James Dolan was trying to separate the sports and the entertainment companies. Focusing on Sphere Entertainment Group, this includes, we'll call it Sphere 1 in Las Vegas that we just described, and a plan to build Sphere 2 in London. You're also getting what is described as a humanoid spokesbot named Aura that welcomes people into the venue and takes questions about engineering and might look a little bit like the iRobot stuff. Anyway, the thing that's also packed inside of this company, Nick, that not a lot of people are talking about is Madison Square Garden Networks. That's right, you're getting a cutting-edge LED 20,000-seat theatre and a legacy cable media company. It's easy to like this company from an entertainment perspective but how about from the investment side? Seems like an odd couple. 

Nick Sciple: Definitely, it seems like an odd couple. A segment of the market that, hopefully, we see dozens of these spheres all across the world. In an area, when you look at some of these regional sports and entertainment networks, really been challenged as we see an evolution in what cable companies are willing to spend for some of these networks that has really presented a challenge. The vast majority of revenue today is coming from these existing sports networks. They have two MSG Network and MSG Sports Net serving the Northeast. Also have an over-the-top service MSG Plus where you can watch your local Rangers games, Islanders, things like that really driving most of the revenue today but obviously, the exciting opportunity is that the sphere has just opened and lots of folks are excited to go. Couple of opportunities for revenue you might expect. You've got a 18,600 state arena that they're going to hold events in throughout the year, going to generate revenue from that. Also, an interesting advertising opportunity we had the pitch deck for that advertising presentation leak over the past couple of days. The rates are $450,000 a day to run your advertising copy on the Sphere or for a week at $650,000.

This includes also working with a group of over 300 designers from that MSG group to help generate the creative you need for this very unique structure. They estimate that they will generate 4.7 million daily impressions, 300,000 of those coming in person, folks walking out on the strip in Las Vegas or playing on the golf course where you're inside of the Wynn Golf course. I guess that's some very valuable real estate but also 4.4 million estimated social media engagements. Folks like me and you, Ricky, that probably haven't been out to Las Vegas since this thing opened, have seen some of those ads out there. If you run those numbers it's just to your quick $450,000 a day times 365 days a year $165 million a year in potential revenue if you're fully booked that could be an interesting opportunity. Certainly, a lot to be proven out when it comes to the advertising sales, and then also is the excitement around this U2 concert going to remain as things move forward. The nice thing that maybe gives the company a little bit of a cushion, has $340 million in cash and cash equivalents on their balance sheet. Another $270 million in masking Square Garden Entertainment stock that likely will be used to fund future operations going forward, a mix of businesses. The exciting one is the Sphere we'll see where things go.

Ricky Mulvey: Right now it's getting a lot of social media attention, certainly a lot of hype. What would you say to investors who are maybe thinking about taking a nibble in what is probably the shiniest object on the planet?

Nick Sciple: I would say that just know that the type of investment, I would say speculation that you're making here today, we've had one concert. We're on the first run of concerts here at this arena. It cost billions of dollars to build one of these and we've yet to prove out the ROI on that original investment. What are we going to fall back on if this sphere doesn't work? We have some challenged regional sports properties. We just saw ESPN have a challenged negotiation, I think we're likely going to see some of these MSG networks have some challenges as well. Just keep in mind that for this investment to work out, you're going to need to see many multiples of these spheres being deployed in the world. This is almost like a venture capital investment where you shouldn't be surprised if you lose a decent chuck of your cash. But if things work out, you can tell a story where things work out great for you. That should be reflected in the weight that you put on this stock in your portfolio.

Ricky Mulvey: All right, well we'll see what too many spheres make. Nick Sciple, appreciate your time and your insight.

Nick Sciple: Great to be here, Ricky.

Ricky Mulvey: Before we get to our next segment, just a quick reminder, if you've got a question, take, maybe there's a company you'd like us to cover shoot us the email at [email protected]. That is podcasts with an S at fool.com. If you like the show, leave us a review or rating on your favorite podcast app. What could change your spending in retirement? The biggest culprit might not be healthcare. Robert Brokamp caught up with Roger Young, a certified financial planner and the thought leadership director at T Rowe Price to talk about how retirees actually spend and how you can plan for it.

Robert Brokamp: Retirement planning starts with having an idea of how much annual income you'll need when you stop working and people have likely heard that they need anywhere between 70% and 85% of their pre-retirement income. You wrote a report on this topic. What figure is a good starting point and how did you determine it?

Roger Young: Well, before I launch into the specific number, a couple things to get out of the way. First, though, I do want to define that term what we call income replacement rate. I think you described it well, but I want to make sure we're talking apples to apples and it's income before taxes that we're talking about so comparing post-retirement to pre-retirement. We're not mixing this up with spending versus income or pre- or post-taxes. Before taxes, most people have a sense of what their gross income is. I make x thousand dollars per year. Of course, remember this is all a rule of thumb. Everyone's different. It makes sense to do a more detailed planning as you approach retirement. Now that the caveats are out of the way, [laughs] our analysis showed that a 75% income replacement rate is a good starting point for a lot of people. You might immediately say, well, why shouldn't it be close to 100%? Why do I need so much less income? Very briefly, three main reasons. One, you no longer have to save for retirement when you're in retirement. People are hopefully saving, we recommend 15% or maybe they're saving five or 10 or 15 or whatever. You don't have to allocate that portion of your income anymore. Second, most people, not everyone but most people spend less on average in retirement. Then third, due to those factors and some other things like not having payroll taxes anymore, most people are going to have lower taxes in retirement. You add those things up and a lot of people, the number is around 75 instead of 100.

Robert Brokamp: The tax part really is remarkable. I don't think people appreciate how much their taxes will go down for many reasons. One is a lot of the income that retirees have, like social security, is at least partially tax-free. You get a higher standard deduction when you're 65 and older. A lot of other sources of income withdraws from a Roth, for example, or long-term capital gains. It's all taxed at lower rates. For many people, their tax bill will drop dramatically.

Roger Young: Yeah. With that 75% number, we're assuming that to get from 100 down to 75, 8% of it is not saving for retirement anymore. Again, that varies by person. Five points of it we attribute to people spending less, and the other 12% we attribute to lower taxes. I think we're being even hopefully conservative on that because of reasons you mentioned, like Roth and other things that are taxed less, we don't even assume people have Roth accounts when we come up with that number. Yes, the taxes it's an area where people don't have a great understanding of it and so by doing things before tax gross level, hopefully, we're telling people a message of we're doing the tax calculations for you. You don't have to do that, just take our word for it. Hopefully, you're going to be incurring less in the way of taxes in retirement.

Robert Brokamp: A big variable in the calculus of retirement is Social Security. The amount that is going to replace of your pre-retirement income depends on a lot of factors. Explain how marital status and household income will play into how much Social Security is going to help you.

Roger Young: Following on the conversation about replacing your income in retirement it's interesting when we did the analysis, marital status and income level don't have a huge impact on that replacement rate that 75% rule of thumb I mentioned. It goes up a little bit as your income level increases, but not too much. What does change significantly is what you pointed out, how much of that income is going to be replaced by Social Security. As your income increases, Social Security replaces less. That's just how the benefit formula works. If you think about it, it's also consistent with how you're taxed. Up to a certain level you have the Social Security tax, over that level you don't have that portion of the FICA tax that goes away. Now, marital status also affects your Social Security benefits and one key way is that if you're married, you can benefit from the spousal benefit, even if you're a sole-earner couple. That spouse who doesn't work can get some Social Security benefits in their name in addition to the primary earner. There are some nuances there. I wouldn't say that's necessarily as big an impact as the income side, but it does make some difference.

Robert Brokamp: I'm not going to tip numbers on that because it is interesting. Just pulling some numbers from your report, assuming a household has $100,000 for the single person, Social Security is only going to replace 28% of that, a married household but only one earner 42%, and married dual income 36%. The people who are doing the best are the people who are married, only one income earner, the single person only getting a 28% replacement rate, which is really shocking. In fact, this is one of the reasons why being single is actually a little bit more financially challenging. Certainly understanding how Social Security is going to play into your retirement is crucial.

Roger Young: Yes. Now, of course, the single people they only have one income, so they might have a lower income than a dual-income married couple but yeah, comparing a single person to a sole-earner married couple is a more direct comparison. Yeah, there is definitely a difference in how much you'll get in Social Security for the same level of household income.

Robert Brokamp: We talked about how to estimate the amount you need in your first year of retirement. But I often say that retirement isn't one goal, but it's a series of annual goals. The amount you need in that first year, the amount you need in your second year, the amount you need in your third year from the day you retire to the day you expire. To a price recently published report about spending in retirement what do we know about how expenses change as you go through retirement?

Roger Young: My colleague, Sudipto Banerjee, has done a lot of work on spending in retirement. It's very important, as you point out, a lot of the rules of thumb we talk about, things like the 4% rule people have heard about in terms of being able to withdraw 4% of your assets sustainably. That's based on a flat spending level. Our income replacement rate that I just talked about, that was based on a flat spending level. Those are not a complete picture of reality. It goes back to that initial caveat. These are rules of thumb. You need to think about what your situation is going to look like. What Sudipto Banerjee, my colleague, found is that on average, real spending, so spending, excluding the effect of inflation, that tends to go down by about 2% per year in retirement. Now people might be thinking, well, I'm going to spend a lot more in medical costs. That generally is true and certainly has potential to be big numbers, especially late in retirement but generally, other expenses tend to go down and those tend to outweigh the increase in medical costs. That was the overall finding and there's other work that he's done in the field as well.

Robert Brokamp: Basically, really what it comes down to is as we get older, we just do less, we eat less, we travel less, we spend less, we buy less. We may enter retirement with a mortgage that goes away. Sadly we may enter retirement married, but a spouse passes away and expenses drop another 10-20%. This assumption that many people make that expenses actually go up every year with retirement overstates how much we may need, although it really does depend on your situation. In terms of healthcare costs, the more your healthcare costs rise, it's often offset by other things. The worse your health is, the less you can travel, the less you can go out to eat, the less you're probably driving your car. Expenses go down on average, but that's the average and this is a key part of the report which found that there's actually a good bit of volatility in retirement spending. What ups and downs did the research show?

Roger Young: There's a fair amount of volatility out in the real world when it comes to retirement spending.

Roger Young: Our work as Sudipto's work found that looking at people over two year periods, roughly one quarter of households see spending go down by 20% or more. Then another quarter of people will see an increase in that two year period of roughly 17% or more. Those are significant changes in spending for roughly half of the population. His research found that that tends to be true for people across the various ages in retirement. So whether you're talking about people just retired in their '60s to people late in retirement in their '80s and '90s, you can still see those spikes. So it's not necessarily just one thing that causes it like, having to go into a nursing home or something like that, there is that potential for significant spending changes throughout your retirement.

Robert Brokamp: I think one of the most surprising takeaways for this report is you touched on it. Most people would probably think it's healthcare, but actually 25% of the variability and spending was due to home related expenses. Only 5% due to health, care and 3% due to transportation.

Roger Young: Yeah, I do think that that's the area where, Sudipto's research was somewhat surprising. We do tend to think of expenses in a couple of different buckets. The discretionary or non discretionary. We're looking at a different way optional versus essential. And those essentials would include things like housing, healthcare, transportation, and you might think that those essentials are somewhat fixed like a mortgage payment, but you pointed out earlier, people can get rid of a mortgage payment. What Sudipto found is for people at lower income levels, the non discretionary expense categories, primarily housing, actually are what caused most of the spending volatility. People change where they live, and that affects a lot of that expense. Now, as you move up to higher income levels, the discretionary expenses drive more of the volatility. So you think those households have more flexibility to decide, or maybe my portfolio has done well over the past year. Let me plan another big trip. Let me buy an expensive guitar, Robert, things like that. A lot of the upticks are temporary, but in at least 15% of the cases, a household's still spending at that elevated level after four years.

Robert Brokamp: How should retirees plan for this possibility that their expenses will spike for 2-4 years or longer?

Roger Young: Well, a few ways. First, I guess maybe a quick reality check, we think of volatility is as bad and spending increases are bad. I think having a mindset, where those two spending increases aren't necessarily a bad thing. It could be nice if you have some growth in your portfolio and that leads you to a higher level of discretionary spending. One of the things Sudipto found is that changes in discretionary spending are highly correlated with changes in your level of satisfaction from a financial standpoint. So it can be good, but it can also be a shock that you weren't prepared for. So that potential for unexpected changes is definitely something you want to plan for. A clear takeaway from our report is you want to have some liquidity in retirement. So liquidity meaning assets that you can get to in a hurry, that aren't really volatile, that will generally hold their value pretty well. So cash obviously is very liquid. Most people in retirement don't tie up all of their resources in a guaranteed income type product that locks in the ability to have income, but at the same time doesn't have that liquidity. You can't access that money anymore. We do think it's good what most people do, that they don't tie up all their assets in that way. Within your investment portfolio, you also want some mix of things. You want some investments with growth potential, and others that are more conservative. One way to frame this is, finance researchers have thought a lot and written a lot about investment volatility and volatility of your returns. I think there's been less said about this spending volatility issue. You want to protect yourself against both of those, and especially both of those going against you at the same time. So if you get hit with one of these spending shocks, your spending is up 25% over two years, and at the same time, the stock market has had a downturn. That can be painful if you're having to take money out of stocks that have gone down. It really helps to be able to draw on your cash or investments that probably didn't go down as much. I'm going to throw in one more type of diversification that I've done a fair amount of work on, tax diversification. So what does that mean? That means having some assets in different types of accounts that have different tax treatments. You mentioned earlier Roth accounts, that's a great example. If you have some Roth assets, you might draw on those to cover some of your unexpected expenses instead of taking distributions from a tax deferred or traditional account where all of that money is taxable and it could push you into a higher tax bracket. There are a lot of things to consider in terms of preparing yourself for changes that are unexpected.

Robert Brokamp: Yeah, that's a whole other aspect of retirement and in that you have somewhat control of your tax situation, but that if you are forced to take out money from a traditional IRA or sell something in that capital gain, that's going to drive up your tax bill, which then come April 15th, you have to come up with more money to pay those taxes, which means you have to take more money out of the account and sell more assets. It's like this tax snowball, but if you have some money in that Roth account, you can take that out tax free, and cut that off right there. 

Roger Young: Yes. That's a good way of putting it. I hadn't thought about the snowball come April 15, but yes, if you don't plan ahead for the fact that you're taking money out that has to cover the taxes as well, that can be a rude awakening. 

Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about, and the motley fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll see you tomorrow.