Are you worried your savings won’t last through retirement? You’re not alone. According to the 2016 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.1
While saving is an important component of retirement planning, it’s only half of the equation. The other half is how you manage your savings after you retire. If you don’t keep your spending in check, you may deplete your savings at a fast rate. Even the most substantial nest eggs can be depleted quickly by excessive spending.
A written spending plan can help you preserve your assets and enjoy a comfortable, financially stable retirement. A spending plan serves as a budget so you can see how your money is spent and whether you are on-track. You can also use the spending plan to inform your decisions about how much in distributions to take from your retirement accounts.
Developing a spending plan can be challenging, though. 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 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 may be to assume that your annual spending will stay constant through retirement. You might base this estimated amount off your current spending, or you could base it off a percentage of your preretirement 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.
There are some problems with this approach, though. 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. Inflation is the gradual increase in prices of goods and services over time. It affects everything from food to clothing to healthcare and more. Although a flat spending plan may be simple, it may not be the most accurate approach.
A second approach is to assume your spending amount will gradually increase each year. For example, you might assume that your expenses will increase at the same rate as inflation. You also may want to assume larger spending increases in your later years to account for health care and long-term 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. It also helps you preserve a portion of your assets for the later years of retirement.
However, an increased spending plan may also force you to live on a lean budget in the early years of retirement. That could be an issue if you plan to use those years to travel, pursue new hobbies, and spend on other discretionary items like shopping and dining out. 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.
An intriguing alternative is to vary your projected 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.
Ready to develop your retirement spending plan? Let’s talk about it. Contact us at Trinity Financial today. We can help you analyze your needs and create a strategy. Let’s connect soon and start the conversation.
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