Retirement Spending
Retirement Spending – Living Your Dreams
With many future retirees living longer than their parents did, the question of how to manage retirement spending and retirement expenses offers greater opportunities and greater challenges. You’ll have more time to spend in retirement, and you’ll need more money to spend.
Predictions about life expectancy suggest that the coming generation of retirees should plan to live into their early 90s. Better to end up with a little extra retirement budget, or to pass on, than to run out of money too early. The amount you’ll need to spend in retirement may be more than your parents needed – but that also means the time you spend in retirement may be longer and more fulfilling.
Before we look at some details of how to think about retirement spending, let’s think about the big picture. If you’re going to enjoy spending in retirement the money you saved while working, you’ll want to think about your dreams.
Time is the Most Valuable Thing You Will Spend in Retirement
Making the shift from work life savings to retirement saving and spending can be a challenge. It’s a whole new way of life – from the busy, structured life of managing a career, and the delayed gratification of saving, to the open freedom and long awaited dreams of retirement.
If the work of sensible saving is going to be worth it, you have to be ready to spend that money well. Yes, you want to be prepared for health costs and emergencies but, with any luck, the money you spend in retirement will also be about your new world of free time. Just like a fulfilling career, a fulfilling retirement benefits from planning and retirement investing.
If you know ahead of time how you want to spend your retirement, you’re more likely to enjoy the things you do. You won’t feel adrift – even if that plan is to get into some retirement travel drifting across country in an RV, down the coast in a boat, or even just through your mornings with the crossword. Write down your dreams, make lists – lots of lists. Whether it’s vacations or volunteering, gardening or globetrotting, family or friends, think through what you want to do with the time you spend in retirement.
Retirement Spending – How to Be Realistic
To live your dreams well, you’ll need to look hard at how to manage your retirement portfolio, good strategies about retirement travel and retirement activities and useful tools like retirement spending calculators.
Many studies show that people’s spending in retirement is less than their spending while working. Some economists say that’s because people don’t save enough and are then stuck having to make do with less. The opposing argument is that retirees are living happily on less because they’ve paid off their mortgages, don’t have work-related costs (from dry cleaning to dinner out), and can substitute time for money.
Most advisers recommend that you set yourself up to receive a steady retirement income – treat retirement as a job, and set your own salary.
What should that salary be? The 4% rule is a widely recommended way to approach to drawing on your savings – that is, in your first year of retirement, expect to draw out and live on 4% of your savings. After that, you’ll adjust your ‘salary’ upward each year to account for inflation. If you drew $40K out of a $1 million 401(k) your first year, and inflation was 3%, the next year you would pay yourself $41, 200, roughly $42,400 the third year and so on.
Whatever the sources of your annual retirement ‘salary,’ you’ll also want access to about 18 months of ready cash, in a money market fund or other secure account, which you can easily transfer into your checking account if something comes up.
With a steady ‘salary’, and ready cash for emergencies, the money you will be spending in retirement can be more easily budgeted – around your needs, and around your dreams. Retirement spending is most fulfilling when it takes both into account.
