Every year for the past 16 years, Gallup has surveyed Americans about their biggest financial worries. In every study, Americans have named retirement as their top financial concern. The 2016 study was no exception. Nearly two-thirds of respondents said they were concerned about not having enough money for retirement.1
When planning for retirement, many people focus on saving enough assets. However, saving is only half the battle. Even after you accumulate enough assets for retirement, you still have to make sure those assets last throughout your lifetime. If you spend too much money too early in retirement, you could quickly deplete your savings.
That’s why it’s so important to develop a written retirement spending plan. A spending plan serves as a budget so you can gauge your spending and keep yourself on track. It can also help you determine how much to take in distributions from your retirement accounts.
Developing a retirement spending plan isn’t easy, though. You can’t predict the future. You don’t know what your spending needs will look like 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 in retirement spending plans. 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.
The simplest approach is to assume a level spending amount in retirement, based off your current spending or off a percentage of your preretirement income. This approach is popular because it allows you to quickly determine how much money you need to save. Multiply your planned spending amount times the number of years you expect to be retired, and the result is your target nest egg.
Unfortunately, there are some problems with this approach. One is that an assumption of level spending doesn’t account for inflation, which is the natural increase in prices over time. Another issue is that this approach doesn’t account for increased spending on health care as you get older. Costs for long-term care, hospitalizations and more could consume an increasing portion of your budget. Although a flat spending plan may be simple, it may not be the most accurate approach.
A more accurate approach may be to assume that 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.
This approach can be helpful because it accounts for inflation and the possibility that you’ll have increased health care needs as you advance in age. To fund increased spending in the later years of retirement, however, you may have to adhere to a leaner budget during the early years.
An interesting alternative approach is to vary your spending from month to month or year to year based on your activity. For example, if you plan on traveling in the warmer months of the year, you might assume that your spending will increase in those months. Then, during the winter months when you are at home, you could assume a lower level of spending.
One challenging aspect of this approach 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.
Ready to develop your retirement spending plan? Let’s talk about it. Contact us at BridgeRiver Advisors today. We can help you analyze your needs and create a strategy. Let’s connect soon and start the conversation.
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