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How to get your spending in retirement just right

Spending your retirement savings too slowly is almost as bad as spending it too quickly.

Which scares you more: dying or running out of retirement money?

Most say the latter, according to a recent survey.

While it’s prudent to be careful with your retirement savings – so you don’t run out of money, regardless of how long you live – being too careful has its own downsides. It is impractical to deny yourself the senior lifestyle pleasures that you’re truly able to afford – such as a world cruise, a big-screen television and helping the grandkids pay for college – and constantly fretting about money, ever worried that your piggy bank might become empty.

One reason so many retirees scrimp is because they fear that retirement will cost them a lot of money. But research shows that people with at least $500,000 spend only 12% of their retirement money in their first 20 years – suggesting that they could have spent far more and still enjoyed ample financial security.

Retirees are often overly cautious because retirement is new to them. Uncertain of what lies ahead yet knowing that large health care costs are likely at some point, retirees are more apt to hoard than squander their retirement savings.

So, how much is safe to spend? We begin by recognizing that retirement isn’t just a change of lifestyle; it’s a shift in mindset. And just as you will live as never before, you must also manage your retirement money like never before.

Imagine (or recall) the first day of retirement. Suddenly, you have 10 hours available today that you never had before. And another 10 hours tomorrow. And the day after that. And so on – for the next 30-40 years!

And the bulk of that time could easily be filled by spending, rather than earning, money. The senior lifestyle is different. Joining friends for lunch, shopping, traveling or engaging in hobbies – all these cost money. So even though you won’t spend money by contributing to a retirement plan at work, paying FICA taxes or commuting, you’ll spend money in new ways.

This is why nearly half of retirees spend more money in retirement, not less, during their first two years of retirement, according to the Employee Benefit Research Institute. And 33% of retirees continue to spend at that level for six years into retirement.

You surely don’t want to run out of money before you run out of life. So find a balance between overspending and denying yourself the enjoyment you now deserve, thanks to a career that was focused on earning and saving money.

5 tips to get your spending in retirement just right:

  1. Consider how you’ll spend your time. Think about the kind of retirement lifestyle you want. Then consider the financial requirements and the resources available to you. You need to balance discretionary costs with essential expenses such as housing, food, utilities (including internet and smartphones), transportation, clothing, health insurance and health care.
  2. Try it before you buy it. Do you want to retire in Florida or Arizona? Before you buy a house, rent a house for a year. See whether living there meets your expectations. It’s easy to buy, but selling is difficult, time-consuming and expensive – so take your time.
  3. Track discretionary spending. Your first day of retirement is radically different from your last day of working, so let’s track the impact of your new lifestyle on your spending. By recording your spending in your first year of retirement (or looking at your past 12 months, if already retired), you can see how much money you’re really spending. We can then compare that to your income, to see whether your spending in retirement is sustainable. Chances are, you’ll discover that you can actually increase your spending rate!
  4. Plan for large retirement expenses. Home renovations, college tuition for grandchildren, health care – each of these can be six-figure costs. A 65-year-old retired couple today will spend $285,000 on health care, according to the U.S. Department of Health and Human Services. And half of all those who retire will incur long-term care costs; the average cost of a nursing home is $100,000 per year, according to Genworth. These costs aren’t likely to appear in your current retirement spending list, but you do need to plan for them. And by doing so, you may discover that you can still spend lots of money enjoying yourself now – and you can do so worry-free!
  5. Decide how you feel about bequests. How much of your current assets do you want to leave to your kids and grandkids? Some retirees are adamant that their entire net worth be preserved for their family. Others have a “they get whatever is left” point of view. Your outlook affects how much of your money you’re able and willing to spend on yourself – and we can often offer strategies that do indeed let you have it both ways.

Generating retirement income requires planning. It’s not enough to focus on today’s expenses. Health care, inflation, inheritances and more can make retirement even more financially complicated than your working years were. With all that in mind, you might want to consider discussing your needs with a financial planner.

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