Making your retirement savings last for 20, 30 or more years takes careful budget planning. Where do you start? Here are three options to consider.
If you’re worried about having enough money to fund your retirement, you’re not alone. According to the 2018 version of Gallup’s annual survey about Americans’ biggest financial worries, retirement topped the list for the 16th year in a row. Nearly two-thirds of respondents said they were concerned about not having enough money for retirement.
Of course, having enough money is only half of the equation. Even if you save a significant amount for retirement, you still have to manage your spending throughout retirement to make sure your funds last. Excessive spending can quickly deplete even the most substantial nest egg.
That’s why it’s so important for retirees to have a written spending plan. A spending plan serves as a budget and also as a guide for distributions from your retirement accounts. You can check your spending against the plan at any time to see if you are on track or if you have veered off course.
It’s no easy task, though, to develop such a spending plan. You can’t predict the future. You may not know what your spending needs will be as you get older. How do you develop a spending strategy when so many of the variables are unknown?
There are a few different approaches you can take to planning your retirement spending. Below are three strategies commonly used. Base your spending plan on your unique needs and objectives. The important thing is to have a plan that works for you and to follow that plan so you can protect your retirement assets.
Perhaps the simplest approach is to assume a level spending amount throughout your retirement. You might base this amount off your current spending, or you could base it off a percentage of your pre-retirement income. The advantage of assuming a flat spending amount throughout retirement is that it makes it fairly easy to determine whether you’ve accumulated enough assets.
However, there are some issues with assuming a flat spending amount. One is that a flat spending plan may not account for unpredictable expenses that could pop up in retirement, such as home repairs, medical costs or even the occasional vacation. A flat spending plan also doesn’t account for inflation, which could have a sizable impact on your expenses over the long term. Although a flat spending plan may be simple, it may not be the most accurate approach.
A second approach is to assume your spending needs will increase gradually from year to year throughout your retirement. For example, you might factor your expenses to increase at the same rate as inflation. Or you could build in greater increases in spending in your later years to account for long-term care needs and health care costs.
A plan that incorporates increasing expenses can be helpful, because it accounts for inflation and the possibility that you’ll have increased health care needs as you advance in age. However, you may want to enjoy the early years of retirement, when you are healthy enough to travel and pursue hobbies and other activities. If so, you may not like the idea of reducing your spending in the early years so you can spend more in your later years.
One intriguing approach is to vary your spending from month to month or year to year. For example, if you plan on traveling in the warmer months of the year, you might assume your spending will increase in those months. During the fall and winter, though, you may opt to live on a much tighter budget.
A dynamic spending plan could have behavioral benefits. If you give yourself certain months or periods of time in which you’re allowed to spend more money on fun activities, you might have less incentive to go over budget during other times.
Of course, the tricky part of a dynamic spending plan is that you have to stick to the budget. If you don’t stay under budget during the lean months, you won’t be able to afford the periods of time when you are scheduled to spend more money on vacations or other fun activities. If you don’t have that kind of financial discipline, a dynamic spending plan may not be the best option for you.
The Bottom Line
Your spending plan and budget can make or break your retirement lifestyle. Spend too much early on, you may not have enough to cover inflation or rising health care expenses. At the same time, you want to enjoy the lifestyle you and your spouse envision for your golden years.
Discuss with your spouse the goals you have for retirement and write them down. Then, discuss the timeframe in which you want to achieve them. Cruise at the beginning of your retirement? Month-long European vacation when you’re 75? By planning your budget around the big expenses now, you will have room to plan for any surprises in retirement.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation.
Janet Pack is president and owner of Senior Retirement Advisors, a registered investment advisory firm. Janet's expertise is in helping clients preserve assets for the future and setting up legacies for their families. She believes her clients should have information to assist in making these important retirement decisions.