Are you one of the many Americans who is worried about having enough money for retirement? 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 assets to fund retirement.1
Of course, accumulating assets is only part of the equation. Even if you save a significant amount of retirement assets, you still have to manage your spending to make those assets last. Excessive spending can deplete even the most substantial nest eggs.
A written spending plan can help you keep your expenses in check. A spending plan serves as a budget and also as a guide for distributions from your retirement accounts. You can check your spending against the plan at any time to see if you are on track or if you have veered off course.
Developing a spending plan isn’t simple, 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 to planning your spending may be to assume level expenses throughout your retirement. You might base you spending amount off your current expenses, or you could base it off a percentage of your preretirement income.
The benefit of this approach is that it makes it easy to calculate how much assets you need to fund your retirement. Simply multiply your estimated annual spending times the number of years you expect to be retired. The result is a quick ballpark of the amount of assets needed to fund that spending level.
There are some problems with this approach, however. 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. Although a flat spending plan may be simple, it may not be the most accurate approach.
Gradually Increased Spending
A second approach is to assume your spending needs will increase gradually from year to year throughout your retirement. For example, you might factor your expenses to increase at the same rate as inflation. Or you could build in greater increases in spending in your later years to account for long-term care needs and health 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. However, you may want to enjoy the early years of retirement, when you are healthy enough to travel and pursue hobbies and other activities. 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.
One interesting approach is to vary your spending from month to month or year to year based on your behavior and planned activities. 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.
Of course, the challenge in this approach is that you have to live within your budget, especially during the lean months. If you don’t stay under budget during those times, 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 Grand Canyon Planning Associates today. We can help you analyze your needs and create a strategy. Let’s connect soon and start the conversation.