Spending during your retirement
The moment you’ve been waiting for is here…retirement. Now, it’s finally time to kick back, sleep in and travel the world. Sounds like a great plan, but unfortunately you don’t escape finances when you retire, just cubicles. In order to keep things smooth sailing in your golden years, you have to keep track of your spending, make a budget and plan for the future.
Determining a budget
Figuring out how much to spend annually during your retirement depends on a variety of things, some of which are in your control, and some of which are not. For example, unless you’re a psychic, you probably don’t know how much longer you are going to live. Somber, but true. Something you can control is your spending. You just need to do a little planning ahead of time to know what you’ll need.
When determining your budget, consider what expenses you will have and what you will still be spending money on. Some things to keep in mind:
- Gas, clothing, food and other general expenses
- Payroll taxes
- Income taxes
- Debt payments (mortgage, cars, etc.)
- Life insurance
Whether your retirement dream includes traveling the world or spending time with the grandbabies, you can’t forget that life is unexpected. While you may be healthy now, things can change quickly. This means expenses could change quickly too, so be sure to consider the following:
-Healthcare. Issues can develop with age and you might need to visit a doctor more than once a year.
-Assisted living or part-time care.
-Accessibility modifications to your home.
All in all, it comes down to deciding what you need to have (a cell phone plan to call the grandchildren) and nice-to-haves (Netflix subscription).
Breaking down the 4 percent rule
The 4 percent rule is a general plan for retirement spending that says you should spend 4 percent per year of your retirement savings. So if you start off with $1,000,000, you should spend $40,000 per year, even as your money continues to grow. That’ll give you 25 years of income, plus a little more as your assets continue to grow.
However experts say that the 4% rule is merely an opening bid. Retirement spending and how much you will actually need is too complex to have a general rule of thumb.
Varying your spending rate
The 4 percent rule isn’t the only way to go. Lots of people spend more in their early years of retirement because once you’ve taken your dream trip to China, it’s steady spending from there. You can vary your spending rate based on inflation, what’s happening in the stock market, and your lifestyle needs. For example, when the stock market is booming, you can spend a little more. Or you could withdraw a bit more every year to match the rate of inflation. The choice is yours whether you want to have a strict plan or allow for a little flexibility.
What if it’s not enough?
If you do some recalculating five years after retirement and find that you’re spending too much to be sustainable, you either have to cut back on spending or find a new source of income. Many retired people work part-time to make a little extra money (and get a little extra social time, too).
There are no set-in-stone methods for budgeting during retirement. Some like to live it up while others prefer to live simply. Find a spending rate that works for you and your family and make the most of your retirement, whether it be with frequent walks in the park or frequent trips to Cancun. The choice is yours as long as you plan ahead.
If you’re worried about tracking your spending or need some help figuring out your expenses and retirement assets, Andigo Wealth Management advisors are here for you.
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