As you approach retirement, you might be concerned that you won’t have enough money. That’s why you need a realistic spending plan to supplement your investment or savings plan.
Retirement often produces a strange conflict: You suddenly have much more free time while simultaneously having significantly less income. Your spending plan should help you navigate your new reality.
Retirement spending isn’t linear. A survey from the Bureau of Labor Statistics shows that spending tapers as we age. Household spending for each of the three decades beginning at age 55 was found to be $65,000, $55,000, and $42,000, respectively.1 A second study using data from the University of Michigan shows spending increases toward the end of life as health costs mount.2 These facts make budgeting more complex.
Your 70th year is pivotal. Two important events occur during your 70th year. It is in that year that you can no longer postpone taking Social Security benefits and required minimum distributions from your retirement account. If you are someone who has been able to wait until 70 to receive these cash inflows, your budget will need to reflect this fact. However, many people start taking these benefits before 70.
Your retirement spending plan involves trade-offs. To construct a realistic retirement spending plan, you must separate discretionary and non-discretionary expenses and compare them to your income from all sources. Does your plan adequately capture your actual spending patterns? How quickly will it draw down your savings? Your answers should help you decide if and where you should cut back your spending.
Should you reduce your “fixed” expenses? Over time, you can reduce non-discretionary spending in several ways, including downsizing, relocating to a less costly area, cancelling life insurance policies you no longer need, and ending expensive hobbies that have become less important to you. These steps can help reduce your spending and may allow you to stretch your money further.
Your retirement budget should reflect clear thinking. Preserving your retirement money over the long run means developing and sticking to a spending budget you can live with.
