Will I be able to live comfortably in retirement? The answer, of course rides on the characterization of "comfortable" and the associated level of spending. No matter what the level, comfort increases with confidence in knowing pre- and post-retirement spending needs.
What is a successful retirement?
For most Americans, a successful retirement means sufficiently replacing a percentage of cash flow previously generated from working. Common sources of "replacement" income include Social Security, business or government pensions, drawing from investments and annuities, part-time employment in retirement, and passive income from rental properties or business interests. These sources of income are mostly knowable.
However, outflows of monies – both current and future -- are usually not known with the same precision as inflows; and deciding on a retirement date can be very stressful. However, there are various ways to resolve this dilemma.
The Iron Grip of Successful Retirement Planning
I recently heard an unusual strategy from a couple nearing retirement, both in their mid-60: "We'll spend what we can afford." The couple's default strategy was to make do with what they have. The simplicity was stunning yet practical. Bill and Gwen were successful savers and investors; they intrinsically felt they could handle any financial headwinds. Also, they were perfectly content to dial back their spending to “bare necessities” in order to make their retirement monies last. But, most importantly, they had an iron grip on how they currently spent their money and easily projected that spending into the future. They can make the most of what they have because they know what they need.
But what if you don’t have that iron grip? What if you fall into that more typical group of American pre-retirees who are asking, "Do we have enough to retire," "How much more should we add to our investments," and "What can I spend in retirement to live comfortably?"
These kinds of questions are very common and generally center around making the most out of retirement and figuring out levels of constraint and wishing to avoid excessive restraint. It’s not surprising that many couples raising these questions are incredibly busy with their “day jobs” — raising children, dealing with extended family matters, earning a living, advancing their learning, working long hours, and planning family schedules. They lack the time, energy, or even desire to truly drill down and examine the detail of their spending habits. By working with higher level information and understanding your use of financial accounts, you can make reasonable estimates of your spending.
How to Deduce Your Spending
For individuals looking for help in their retirement planning readiness, a workaround to determine your current spending is to use your net pay as “money available to spend”, review total monthly spending, and identify your major expense items. Here’s a sample action plan:
STEP 1: Review your net take home pay for the previous 12 months.
Your net is what is available to spend or “spending”, if no adjustments are required (assume your income is deposited into one bank account). In the case of business income, determine the distributions from the business for the year.
STEP 2: Consider the following adjustments to “Spending”:
Decrease your “Spending” for:
- Amounts transferred to Saving or Investment accounts]
- Non-recurring disbursements that would not be part of your future retirement spending (i.e. college tuition, home improvement costs, short term loan payments)
- The increase in the account balance for the year
Increase your “Spending” for:
- The decrease in your checking account balance for the year
- Disbursements made from other financial accounts
- Supplemental deposits into your operating account might mean an increase to your spending figure (i.e. gifts received, loan increases, or transfers from investment accounts)
STEP 3: Review the total amount disbursed in your bank statement for each month of the year.
- Review for reasonableness
- Compare to other results
STEP 4: Focus on major and/or recurring items.
- List typical monthly payments for mortgage, utilities, credit cards, utilities, 0% charge cards, and car loans.
- Compare with other results, or reasonableness.
While actual expenditures with detail are best, using estimates will help move your retirement planning process forward, and serve as a good placeholder to assess the practicality and sensitivity of your retirement plan for various spending levels.
Of course, don’t “struggle alone.” Professional financial advisors can offer the help you need for financial goal-setting that leads to a successful retirement.