Mastering Retirement: Crafting Your Spending Plan

Are you approaching retirement? Congratulations—you have worked hard throughout your life and now is the time to reap the rewards of all that effort! But just because retirement approaches doesn’t mean you can simply kick back and rest on your laurels. Now more than ever, proper planning will be key to achieving a comfortable lifestyle as an older adult. Developing an effective retirement spending plan is essential if you want to stay financially afloat while still enjoying everything that comes with retiring from paid employment.

In this blog post, we’ll look at how creating a budget plan, assessing financial risks, taking advantage of resources available to retirees, and other strategies can help ensure holistic financial well-being for many years to come!

The Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2019” shows that 60% of Americans are uncertain whether they are on track with their retirement savings. The average retirement savings for Americans is $65,000, and it is estimated to reach $255,200 by the time they retire.

Key Takeaways

• When planning for retirement, it’s important to evaluate your needs and wants, calculate your retirement income, determine your expenses, and establish a withdrawal strategy.
• A retirement plan isn’t a “set it and forget it” strategy. Regularly reviewing and adjusting your plan based on changes in your financial situation, market conditions, and personal needs is essential to maintaining your financial stability throughout your retirement years.
• Navigating retirement planning can be complex, especially given the long-term implications of the decisions you make. Seeking help from a financial advisor, particularly one with retirement planning expertise, can provide valuable guidance. 

Understanding Retirement Spending

Retirement spending refers to the financial strategy involved in managing one’s income and expenditures after they stop working full-time. Unlike the working years, when you typically earn a steady income to cover your expenses and perhaps save for the future, retirement spending requires more careful planning because your income sources become more limited and your lifestyle expenses might shift.

1. Sources of Income: Retirement income often comes from a mix of Social Security, retirement savings accounts (such as 401(k) plans, IRAs), pensions, part-time work, and other investments.
2. Expenses: Your retirement spending will include everything from basic living expenses (housing, food, healthcare, utilities, etc.) to discretionary spending on travel, hobbies, gifts, and more.
3. Budgeting: Since the goal of retirement spending is to ensure you don’t outlive your savings, it’s important to set a sustainable budget. Many financial advisors suggest a “4% rule,” where you withdraw 4% of your retirement savings in the first year and adjust this amount for inflation in subsequent years. However, this rule might not be suitable for everyone and should be customized to fit individual situations.
4. The sequence of Returns Risk: This refers to the risk of receiving lower or negative returns in the early years of retirement, which can significantly reduce the amount of money that lasts through your retirement years. Hence, it’s important to consider this risk when planning retirement spending.

Common Misconceptions About Retirement Spending

1. You’ll Spend Less When You Retire: Many people assume that they’ll spend less money once they retire. While certain costs such as commuting or work clothes might decrease, others like healthcare and leisure activities often increase. It’s crucial to account for these shifts in your retirement spending plan.
2. All Your Money Should Be in Safe Investments: While it’s important to limit risk in retirement, being overly conservative could make it harder to keep up with inflation and increase the risk of outliving your savings. A balanced approach that includes a mix of different types of investments is usually recommended.
3. Medicare Covers All Healthcare Costs: Medicare, the U.S. government’s health insurance program for seniors, doesn’t cover everything. Costs related to dental care, eyeglasses, hearing aids, long-term care, and other services may not be covered, so it’s important to plan for these in your retirement budget.
4. Retirement Spending is Constant: In reality, retirement spending tends to follow a “smile” pattern. It starts high at the beginning of retirement due to travel and enjoying newfound free time. Then, it generally decreases as retirees settle into their lifestyle, only to rise again later in life due to increased healthcare costs.
5. You Can Predict Your Retirement Expenses: Predicting all of your expenses in retirement is near impossible due to the uncertainties of life, market volatility, and factors like inflation. Regular reviews and adjustments to your financial plan are crucial during retirement.

Elements of an Effective Retirement Spending Plan

Savings

According to Vanguard’s report, which surveyed over 30 million investors, the average retirement savings for Americans is approximately $141,542. However, it’s important to note that the median 401(k) balance is much lower at $35,345, suggesting that most people have saved less than the reported average.

The median account balance represents the amount that the majority of people have saved in their 401(k) accounts. The median is preferred over the mean as a few abnormally high or low values can skew the latter. This also means that half of the account balances are below the median and half are above it.

Retirement savings are impacted by several factors beyond age, such as income and length of employment. Typically, employees who are older and have worked for a longer time tend to have larger account balances compared to those who just started working.

According to Nilay Gandhi, a senior wealth advisor at Vanguard, it is not advisable to focus solely on your account balance since doing so may lead you to react impulsively to temporary market fluctuations and harm your long-term financial objectives.

Gandhi advises investors to concentrate on variables within their control such as expenses, investment decisions, and savings rate, rather than worrying about other factors.

According to John James, managing director of Vanguard’s institutional investor group, participants should aim to achieve a total savings rate of 12% to 15%, which includes contributions made by their employer.

Investments

Investments play a crucial role in funding retirement. They can help provide a source of income and keep up with inflation, thus preserving purchasing power. Here’s a brief overview of different investment options to consider during retirement:

1. Stocks: Although they can be risky, stocks offer the potential for higher returns over the long term. A well-diversified portfolio of stocks can help mitigate some of this risk. Many retirees might choose to keep a portion of their portfolio in stocks to help ensure their savings grow and keep up with inflation.
2. Bonds: Bonds are often considered safer than stocks and can provide a steady income stream through interest payments. However, they typically offer lower returns.
3. Mutual Funds and ETFs: These are investment funds that pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets. They offer diversification and professional management. Some mutual funds, like target-date funds, adjust the asset allocation to become more conservative as the investor gets older.
4. Real Estate: Owning rental properties can provide a steady income stream in retirement. Real Estate Investment Trusts (REITs) are another option that offers a way to invest in real estate without having to buy or manage properties yourself.
5. Dividend Stocks and Funds: Some companies distribute a portion of their earnings to shareholders in the form of dividends. Investing in these companies or in funds that focus on dividend stocks can provide a regular income stream.
6. Annuities: These are insurance products that you purchase with a lump sum or a series of payments, and in return, you receive regular disbursements, either starting immediately or at some point in the future.

Remember, everyone’s situation is different, and the right mix of investments will depend on many factors, including your risk tolerance, time horizon, financial situation, and income needs. It’s often recommended to work with a financial advisor who can help develop a personalized investment strategy that fits your specific needs and goals. As always, investments involve risk and it’s possible to lose money.

Social Security

The Social Security Retirement benefit is a monthly payment that replaces a portion of your income when you reduce your work hours or stop working altogether. However, it may not cover all of your income, so it’s important to find alternative methods to cover your monthly expenses as you get older.

Collecting your benefit before your full retirement age has both advantages and disadvantages. On the one hand, you get to collect benefits for a longer period of time. However, on the other hand, your benefit will be reduced. It’s important to consider your personal situation before making a decision.

It is important to remember:

• If you delay your benefits until after full retirement age, you will be eligible for delayed retirement credits that would increase your monthly benefit.
• That there are other things to consider when making the decision about when to begin receiving your retirement benefits.

Pensions and retirement accounts

A pension is a type of retirement plan where an employer guarantees a given amount of monthly income to the employee upon retirement. This income is usually a percentage of the employee’s final salary, based on years of service and the specific terms of the pension plan.

Defined Benefit Plan: This is the traditional type of pension plan. The employer contributes to the plan and promises a certain monthly benefit on retirement.

Defined Contribution Plan: In this type of plan, employees, and sometimes employers, contribute to the employee’s individual account in the plan. The employee will ultimately receive the balance in the account, which is based on contributions plus or minus investment returns.

Unfortunately, traditional pension plans have become less common in the private sector, with many companies shifting to defined contribution plans like 401(k)s due to their lower costs and liabilities.

Retirement Accounts:

These are tax-advantaged accounts that individuals contribute to during their working years to provide income during retirement. The main types are:

401(k) and 403(b) Plans: These are offered by employers. Employees make pre-tax contributions, and the investment grows tax-deferred until retirement, at which point withdrawals are taxed as income. Some employers match a portion of employee contributions.

Traditional IRA (Individual Retirement Account): Contributions may be tax-deductible, and the investments grow tax-deferred until retirement. Withdrawals in retirement are taxed as income.

Roth IRA: Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free, including the earnings. This can be advantageous if you expect to be in a higher tax bracket in retirement.

It’s worth noting that for both pensions and retirement accounts, the age at which you can start making withdrawals without penalty is 59.5, and the age at which you must start taking Required Minimum Distributions (RMDs) is 72.

Both pensions and retirement accounts should ideally be part of a larger retirement strategy that includes Social Security, personal savings, and other income sources. It’s often beneficial to work with a financial advisor to determine the best strategy for your situation.

How to Design Your Retirement Spending Plan

Evaluate your needs and wants

Creating a retirement spending plan is a crucial aspect of ensuring financial stability in your retirement years. You begin by evaluating your needs and wants. Needs are your essential expenses, the costs that you can’t avoid. These typically include housing, food, utilities, healthcare, insurance, transportation, and basic personal items. Be sure to take into account potential increases in some costs in retirement, such as healthcare.

Wants, on the other hand, are the non-essential expenses that enhance your lifestyle. These might include travel, hobbies, dining out, gifts for family members, and other discretionary expenses. While these costs may not be necessary for survival, they can greatly impact your quality of life in retirement.

Once you’ve evaluated your needs and wants, estimate how much you expect to spend on each category. Remember to factor in inflation, particularly for costs that are likely to rise over time, such as healthcare. Also, consider any changes in spending patterns that may occur throughout retirement. For instance, travel expenses may decrease as you age, while healthcare costs may increase.

The next step is to compare your anticipated expenses to your expected income in retirement, which may include Social Security, pensions, withdrawals from retirement accounts, any income from part-time work, and returns from other investments.

This comparison will give you a sense of whether your anticipated retirement income will be sufficient to cover your needs and wants. If there’s a gap, you may need to consider ways to increase your income or decrease your expenses.

Remember, your retirement spending plan isn’t set in stone. You’ll likely need to adjust it over time as your needs, wants, and circumstances change. Regular reviews and adjustments can help ensure that your plan stays aligned with your goals and that you have the resources to enjoy your retirement years.

Calculate your retirement income

Calculating your retirement income is an essential step in designing your retirement spending plan. You need to consider all the sources from which you’ll derive income in your retirement years. Start with the most predictable sources.

If you’re eligible for Social Security, you can use the estimates provided on your Social Security statement, which is accessible online. Next, if you’re fortunate to have a pension plan through your employer, add the monthly or yearly amount you expect to receive.

Remember to consider income from retirement savings accounts. These could be employer-sponsored plans like a 401(k) or individual retirement accounts like a traditional or Roth IRA. If you’re planning to withdraw a certain percentage annually, calculate that amount. Many financial experts suggest an initial withdrawal rate of 4% of your savings, adjusting for inflation each year thereafter, but the appropriate rate depends on your personal circumstances.

Include any income you expect from part-time work or a post-retirement job. Also consider other investments you have outside of retirement accounts, such as stocks, bonds, rental properties, or annuities. If you own a home, you might also consider the potential for a reverse mortgage, which allows you to receive money based on your home’s equity.

Once you’ve identified all your income sources, add them up to get a total estimate of your annual retirement income. You can then compare this to your anticipated retirement expenses to see if you’re on track or if adjustments need to be made. It’s also prudent to consult with a financial advisor to make sure you’ve considered all potential sources of income and to discuss strategies for maximizing your retirement income.

Determine your retirement expenses

Determining your retirement expenses involves careful analysis and understanding of your current spending habits, as well as thoughtful predictions of how these might change when you retire. Start by assessing your current expenses, including housing costs like mortgage or rent, utilities, groceries, healthcare, insurance, transportation, debt payments, and entertainment.

After having a clear picture of your current expenses, consider how they might change in retirement. For instance, costs related to commuting or professional clothing might decrease or disappear entirely. Similarly, you might pay off your mortgage or downsize your housing, which could reduce your living costs.

On the other hand, some costs could increase. You might spend more on hobbies, travel, or other leisure activities once you have more free time. Healthcare expenses often rise as people age, and long-term care could become a significant expense in later years. If you plan to support family members financially or give significant gifts, include these in your calculations.

Don’t forget to factor in taxes, including possible taxes on Social Security benefits, pension payments, and withdrawals from retirement accounts. Also, consider the impact of inflation, which will likely increase your costs over time.

By determining your retirement expenses, you can create a retirement budget, which can help you live within your means and avoid outliving your savings. However, your retirement budget isn’t fixed; it’s something you should review and adjust as needed, especially when significant life changes occur. Consulting with a financial planner can provide you with personalized guidance tailored to your individual circumstances.

Establish a withdrawal strategy

Establishing a withdrawal strategy is crucial in ensuring your retirement savings last as long as you need them. The strategy you choose should depend on various factors, including the size of your nest egg, your life expectancy, the return on your investments, and your risk tolerance.

A common approach is the “4% rule,” which suggests withdrawing 4% of your retirement savings in the first year and then adjusting this amount each year to account for inflation.

For instance, if you have $1 million in retirement savings, you would withdraw $40,000 in the first year. If inflation for that year was 2%, you would increase the withdrawal by 2% to $40,800 for the next year. This strategy is designed to make your savings last for 30 years.

However, the 4% rule isn’t perfect. If your investment returns are lower than expected or if you live longer than 30 years, you could run out of money. Also, this rule doesn’t account for changes in your spending needs over time or variations in annual investment returns.

As a result, some retirees prefer a more flexible withdrawal strategy. For instance, you might choose to withdraw a smaller percentage when investment returns are poor and a larger percentage when returns are good. Or, you might adjust your withdrawals based on your changing spending needs.

Another factor to consider is the order of your withdrawals. Traditional financial advice often suggests withdrawing from taxable accounts first, then tax-deferred accounts (like traditional IRAs and 401(k)s), and lastly from tax-free accounts (like Roth IRAs). However, the best strategy depends on your specific situation, including the size of your various accounts, your tax rate, and your expected longevity.

Because establishing a withdrawal strategy can be complex, it can be helpful to work with a financial advisor. They can help you create a plan that maximizes your income, minimizes your taxes, and helps ensure your savings last throughout your retirement.

Consider potential risks and inflation

In designing your retirement spending plan, it’s critical to consider potential risks and the impact of inflation. Inflation gradually erodes the value of money over time. It’s essential to factor this into your planning since retirement can last several decades, and the cost of goods and services is likely to increase during this time. A good retirement plan considers inflation and includes investments that can potentially grow and outpace it, helping to maintain your purchasing power.

Market risk is another crucial factor to consider. The value of your investments can fluctuate due to changes in the economy, interest rates, and other factors. Depending on the timing of these fluctuations, market risk could significantly impact your retirement income and how long your savings will last. Therefore, it’s essential to have a well-diversified investment portfolio that can withstand market ups and downs.

Longevity risk, the risk of outliving your money, is another potential challenge. With increasing life expectancies, your retirement savings may need to last longer than you expect. Planning for a long life and considering income sources that last as long as you do, such as annuities or pensions, can mitigate this risk.

Healthcare costs, which often rise faster than general inflation, present another risk. Health issues can arise unexpectedly, and long-term care costs can be particularly high. It’s essential to factor these potential costs into your retirement plan and consider options for covering them, such as long-term care insurance.

Finally, consider the risk of significant unexpected expenses, such as home repairs or financial support for family members. Having an emergency fund can provide a financial buffer for these costs.

Considering these potential risks and inflation is an integral part of creating a robust, comprehensive retirement plan. It’s often beneficial to work with a financial advisor who can help you navigate these issues and make a plan that’s tailored to your situation.

Importance of Regular Review and Adjustments

Once you’ve designed your retirement spending plan, the process doesn’t stop there. It’s essential to regularly review and adjust your plan as needed, ensuring it remains effective in meeting your retirement needs and goals.

Monitoring your retirement plan involves keeping a close eye on your investments, income sources, and expenses. Regularly assess your portfolio to make sure it remains aligned with your risk tolerance and time horizon. Keep track of your spending patterns to ensure they align with your retirement budget, and review your income sources to verify they’re providing as expected.

Changes in the market, the economy, or tax laws could impact your retirement income or the amount you need to withdraw from your savings. In addition, unexpected life events such as a health issue or a family situation might increase your expenses or reduce your income. Regular monitoring of your plan will help you catch these changes and react appropriately.

Making necessary adjustments is about tweaking your plan as needed based on your regular reviews. For instance, if your expenses are consistently higher than expected, you might need to find ways to reduce spending or increase income. If your investments aren’t performing as well as expected, you may need to reconsider your investment strategy.

On the other hand, if you consistently have income left over, you might choose to increase your spending, save more for future needs, or give more to your loved ones or favorite causes.

Additionally, as you move through different stages of retirement, your needs and goals may change. Early in retirement, you may be more focused on travel and leisure activities, while later you may need to focus more on healthcare costs. Regular reviews and adjustments can help ensure your plan evolves with you.

Seeking Professional Help

Seeking professional help for retirement planning can be beneficial at any stage of your life, but there are specific instances where it can be particularly valuable. If you’re just starting to save for retirement, a financial advisor can help you establish a savings plan and investment strategy.

As you near retirement, an advisor can assist in navigating complex decisions about when to retire, how to withdraw from your retirement accounts, and how to plan for healthcare costs. And during retirement, an advisor can help manage your investments, adjust your plan as needed, and deal with unexpected situations.

You may also want to seek professional help if your situation is complex. For instance, if you have a large amount of wealth, own a business, or have a complicated family situation, a financial advisor can provide valuable guidance. In addition, if you’re going through a significant life change such as a marriage, divorce, or the death of a spouse, an advisor can help you navigate the financial implications.

When it comes to choosing the right financial advisor for your retirement plan, consider the following factors:

1. Credentials: Look for advisors with relevant financial certifications such as Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC). These credentials indicate that the advisor has received comprehensive training in financial planning.
2. Expertise: Find an advisor with expertise in retirement planning. They should understand the complexities of retirement income strategies, Social Security, healthcare planning, and other relevant areas.
3. Compensation: Understand how the advisor is paid. Some advisors are fee-only, meaning they charge a fee for their services but don’t receive commissions on the products they recommend. Others may receive commissions, which could potentially influence their recommendations.
4. Fiduciary Status: A fiduciary is legally required to act in your best interests. Not all financial advisors are fiduciaries, so be sure to ask.
5. Personal Fit: Finally, choose an advisor you feel comfortable with. You should trust this person and feel confident in their abilities. They should listen to your needs and goals, explain things in a way you understand, and be available when you have questions or concerns.

Remember, planning for retirement is a long-term process that can have a significant impact on your future financial security. It’s often worth investing in professional help to ensure you’re making the best decisions for your situation.

How to Create an Effective Retirement Spending Plan FAQs

How can I estimate my retirement expenses?

To estimate your retirement expenses, start with your current monthly income and then make adjustments for any expected changes in expenses during retirement.

What is a withdrawal strategy in retirement planning?

Fidelity suggests that as a starting point, it’s advisable to withdraw no more than 4%-5% from your savings during the first year of retirement. Afterward, you can increase that initial annual dollar amount based on the inflation rate each year.

How do inflation and potential risks affect my retirement spending plan?

Inflation can reduce the purchasing power of your savings over time, so it’s important to consider potential inflation when estimating your retirement expenses. Additionally, while investing comes with risks, having an appropriate asset allocation and diversification strategy in place can help minimize those risks and potentially maximize returns.

Why should I regularly review and adjust my retirement plan?

Regular reviews and adjustments are necessary to ensure your plan is still on track. Changes in the market, the economy, or tax laws could impact your retirement income. In addition, unexpected life events such as a health issue or a family situation might increase your expenses or reduce your income. Reviewing and adjusting your plan will help you stay prepared for any potential changes.

When should I seek help from a financial advisor for my retirement plan?

Seeking professional help for retirement planning can be beneficial at any stage of your life. If you’re just starting to save for retirement, an advisor can help you establish a savings plan and investment strategy. As you near retirement, they can assist in navigating complex decisions about when to retire, how to withdraw from your retirement accounts, and how to plan for healthcare costs.

Conclusion

Retirement planning is a great responsibility that should be taken seriously and diligently. All of the steps outlined in this post will help you to create an effective retirement spending plan. Planning for your retirement means taking stock of your current financial situation, evaluating your financial needs and wants, creating a withdrawal strategy, and putting all these elements into practice. This type of long-term planning takes effort but can pay off significantly in the end.

In the long run, creating a retirement spending strategy brings a sense of satisfaction and financial security. So why wait? Plan for your future today!

If you’re ready to create a plan for yourself or if you simply want to learn more about managing money during retirement, don’t hesitate to call or schedule a free consultation today. Doing so can save you time, money, and energy in the future -all essential parts of financial stability during your later years.