Establishing A Retirement Spending Plan

Establishing A Retirement Spending Plan

Many people have a similar vision for retirement.  They want to travel, spend time on their passions and with their family.  But in order to have that, they need income security.  They don’t want to have to worry about how to make ends meet and they’d like to pass assets to their children and/or to charity if at all possible.  In essence, everyone wants the same basic things albeit at different levels.

Unfortunately, another thing that most people have in common is they rarely take the time to do the planning to make the above things happen.  Very few will estimate what their spending will look like once they are done working.  This is particularly surprising because people have lived their life based on a specific budget of their monthly paycheck.

Encouraging Success Through Familiarity

Having a spending plan for retirement will not only make your retirement feel more familiar (like your life now), but is also critical in determining how your portfolio should be structured.  If there is one thing that is absolutely necessary to make your retirement dreams come true, it is establishing a spending estimate in real monetary terms.

Once you retire, the accumulation stage of your life is over.  The next stage is making the money last as long as possible – hopefully beyond your own life if that’s what you desire and having a spending plan is how you can make it happen.

How do you establish a proper retirement spending goal?  This process should begin with an evaluation of what your spending looks like now and then work backward to establish your goal.  Your spending plan should include required income needs and discretionary income needs.

Must-Haves and Nice-to-Haves

Let’s start with items you spend money on now that are must-haves.  Examples of required spending might include your mortgage payment, car payments, utilities, groceries, insurance premiums, phone bills and anything else you can think of that hits your budget every month.

Of those expenses, how many are likely to remain part of the budget in retirement?  Are you on pace to have your home paid off?  Do you anticipate continuing to pay life insurance premiums and maintain multiple car payments?  Look through your bank account and credit card statements and write down all expenses that you anticipate continuing in retirement, and ignore those that will go away.

Food for thought – whether you have a car payment now or not, always keep at least one car payment in the budget.  It’s unlikely that most people will drive the same car throughout retirement and even if you decide to pay cash for a car, it will help to have accounted for it.

Once you’ve totaled these figures, keep that figure handy.

Now, let’s move to discretionary income needs.  It’s important to remember that you’ll soon have six Saturdays and a Sunday, so your discretionary expenses are likely to go (way) up.  Let’s assume you intend to travel more and play more (insert fun activity here).  If you intend to travel quite a bit, try to estimate and annualize your travel expenses, then divide it by 12 to make it a monthly figure.

What would the other fun activities cost?  Country club dues, boating and recreation expenses?  Since many discretionary goals don’t happen every month, try to annualize each of these goals, and then make them a monthly figure.  Once you have a monthly dollar amount for each of these items, add them together to get your discretionary income needs.

Then add your discretionary income needs to your required income needs.

What you end up with is an estimate in today’s dollars of a sample retirement budget.  Many families end up spending just as much or more in retirement as they do during their working years, just on different things.

It’s important to know what you’re striving towards so you can evaluate if it is sustainable based on your guaranteed sources of income and investment portfolio situation.  If it’s not, what other options are there?  More on those topics to come later.



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