Do You Have a Retirement Spending Plan?

Filed under: Retirement

Worried that your savings won’t last throughout retirement? You’re not alone. According to Gallup’s most recent 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 they wouldn’t have enough money for retirement.¹

Certainly, saving money and accumulating assets is an important part of retirement planning. However, saving is only half the battle. Even if you accumulate a substantial amount of retirement assets, you still have to be disciplined with your spending to make those assets last. Excessive spending can quickly deplete even the largest nest eggs.

That’s why a retirement spending plan can be such a valuable tool. A spending plan serves as a budget so you can monitor your spending. It can also act as a guide for distributions so you don’t withdraw too much too soon from your retirement accounts.

Of course, it’s not easy to develop a retirement 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 inputs are unknown?

Below are a few different approaches you can take as you develop your spending plan. Your budget and spending plan should be based on your unique needs and goals. Work with your financial professional and use the approach that works best for your objectives.

 

Flat Spending

One of the simplest methods of estimating retirement spending is to simply assume a flat annual amount for your expenses. You could base this estimate off your current spending or off a percentage of your preretirement income. This approach makes it easy to calculate your income needs and develop a savings goal.

This may not be the most useful approach, though. It’s unlikely that your spending will stay constant throughout retirement. Inflation will naturally raise prices and your cost of living. Your spending on health care could rise as you get older. Although a flat spending estimate may be simple, it’s unlikely to be accurate.

 

Increased Spending

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 assume your expenses will increase at the same rate as inflation. You could also assume that health care and long-term care costs will drive up your spending in the later years of retirement.

One drawback to this type of plan is that it may force you to live on a tighter budget in the early years of retirement so you can afford increased spending in the later years. Of course, you may want to spend your first few years of retirement traveling, dining out, pursuing favorite hobbies and more. If you plan on increasing your spending each year, make sure that you’ll actually stay within budget in the early years.

 

Dynamic Spending

An intriguing approach is to vary your spending from month to month or year to year based on your behavior. 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 leaner budget.

The challenging part of this approach is that you have to stick to the budget. If you overspend during the lean months, you may not be able to afford to increase your spending at other times. This approach requires spending discipline.

Ready to develop your retirement spending plan? Let’s talk about it. Contact us at Ambrose Financial & Insurance Services today. We can help you analyze your needs and create a strategy. Let’s connect soon and start the conversation.
¹http://www.gallup.com/poll/191174/americans-financial-worries-edge-2016.aspx

 

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16606 – 2017/4/25