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Retirement Planning Essentials - Know How Much You Spend Thumbnail

Retirement Planning Essentials - Know How Much You Spend

Insights Retirement Planning

Spending is the most important factor in your retirement plans.  Your spending level has a greater impact on your plan’s success or failure.   (Failure can be easily defined as seeing your account values go to zero before your blood pressure does).   Spending can often be the most difficult piece of the puzzle to identify.  We share some tips to help you easily begin the process of determining your retirement spending.  Then we offer some ideas to help you fine-tune that amount.

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  • 0:00 – Intro
  • 0:21 – Disclaimer
  • 0:25 – Welcome
  • 0:39 – Why your spending matters in retirement
  • 2:45 – An easy way to start determining your spending
  • 4:14 – The details do matter.
  • 5:33 – The challenges created by time
  • 6:58 – Do people spend more or less in retirement?
  • 8:24 – Wants vs. Needs
  • 9:10 – Basic financial survival vs. discretionary spending
  • 10:34 – Don’t withdraw what you don’t spend
  • 11:06 – Wrap up and Outro

Spending in retirement is the predominant factor in the success or failure of your retirement plans.   Most people who have seen their retirement plans fail are guilty of over-spending in relation to their savings.

The basic concept is the same whether you are working or retired.  One of the most basic principles of financial success is “spend less than what you earn.”  While you are working, it is easier to determine how much you earn.  When you retire, the equation changes to what you earn over time.  We know some years will be really good, and other years you will take a step backward.

In general, people who spend more than 5% per year of their retirement savings significantly increase their risk of failure.  We tend to encourage our clients to keep their withdrawal rates at 4% or less each year.   Many believe going forward 4% may put a significant amount of stress on your nest egg.

The first step: How Can You Determine How Much You Spend?

Creating a detailed budget is a tedious task.  Few people like to go through the exercise of reviewing bank statements and credit card statements to figure out how much they spend each month.  There is an easier way to start the process.

Start with your pay stub.   Most people are used to living on their take-home pay, or net pay.  Your net pay has already accounted for major items like income taxes, Social Security and Medicare Taxes, health insurance premiums, 401k contributions, or other major deductions.  

Now you have a very basic estimate of what your spending is.  From this, you can then begin to identify larger line items like your mortgage, car payments, and car insurance.  

Review Those Subscriptions

The world has changed in the last several years.  The way we consume tv and movies has evolved to a subscription-based model.  It is common to see people spending more on things like Amazon Prime, Netflix, Hulu, Disney+, and many others.  Pay close attention to the ones you actually use and consider eliminating the ones that are less important..



The Details Will Matter

Some expenses will not change drastically when you retire.  You will still have to pay the electric bill, the cable bill, and buy groceries.  Some expenses may increase—you may travel more, or play golf more often.  Some expenses may disappear completely.  Line items like your mortgage payment or a car payment may not be a part of your living expenses in retirement.

Knowing the details will become more important as you get closer to retirement.  The plans we can create will have more meaning and be more relevant. The good news:  most of those larger line items are easy to identify.  

Know Your Details

If you are within 5 years of your retirement, start to pay closer attention to the bigger expenses in your budget.  If you see consistent, larger purchases and outlays, determine their importance in your life.  Some of those items are “needs” while others are “wants.”  Prioritizing those can help you make changes more easily if you need to when you retire.


Time Creates Challenges 

The further you are from retirement, the more difficult it will be to focus on a spending number.   The spending habits of a 40-year-old couple with two children differ significantly from the 60-year-old empty nesters.  But there is still value in understanding your spending habits today.

Inflation is going to be a factor between now and your retirement.  Every year, everything you buy costs more.  Right now, those prices are increasing at a faster pace than we have experienced in many years.   This can be factored into your plans.

Lifestyle changes are also going to be a factor.  As you earn more and your life changes, all of us tend to experience “lifestyle creep.”   This isn’t a bad thing, but it can spiral out of control.  Having a good understanding of your spending habits can help you keep this in check.   Just always remember: spend less than what you earn.

Beware of Lifestyle Creep

Some lifestyle creep is OK.   There are no issues with buying a nicer car, a better home, or a new 55” OLED high definition TV.  As your income increases, it is important to enjoy the fruits of your labor.  But remember, moderation is key.  Allow yourself to spend more, but also increase the amount you save as you earn more.

Do people spend more or less when they retire?

In our experience, most people spend less when they retire.  They tend to buy fewer things and spend more on services.  As we age, our ability to do things can also decline, leading to spending even less—or redirecting the spending towards medical care.    

But some people do have plans to maintain or even increase their spending, especially early in retirement.   We have experienced some clients who want to travel and do more things in the early stages of retirement while they still can.  But this needs to be a clear part of your overall plans.

Additional Ideas and Tips – 

Wants vs. Needs -   Identifying priorities in your spending is important no matter where you are in life.  This helps you to make meaningful changes when you need to.

Baseline Expenses – This includes the basics of food and shelter.  How much do you need to keep the roof over your head, the heat and lights on.  That provides a good baseline.  Everything else is discretionary.

Reviewing your spending habits is an ongoing process – In retirement, your spending level is the only thing you can control.  We can’t control investment markets or inflation.  You may find it necessary to make adjustments from time to time.

Don’t let your checking account grow unnecessarily – We often find people take a stream of income to provide a level of comfort.  But withdrawing money from your retirement accounts to accumulate in your checking account is both costly and inefficient.  For most people, their retirement savings are in qualified accounts like IRA’s or 401k’s.   Withdrawing from those accounts creates additional tax liabilities.  Your checking or savings account also does not provide many opportunities for better returns to help you maintain your wealth and purchasing power.

Appearing in this episode:

Todd Kimpel, CLU®, ChFC®

Todd is one of our most experienced financial advisors. He is located in Wheeling West Virginia.

Andy Dollman

Andy is a financial consultant in Parkersburg West Virginia.  He is currently working towards his Certified Financial Planner™ Designation.

Neal Watson, CFP®

 Neal is a CFP® professional in Marietta, Ohio.


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