YOUR RETIREMENT SPENDING PLAN

Some people are good budgeters, and some people hate the concept of budgeting.  Just the word budget can bring up strong feelings in many people. 

This is why I prefer the term “Spending Plan”.  A budget feels restrictive.  Most of us like to spend. 

Regardless of what you call it; it is important to forecast your spending needs in retirement.  It can take a bit of work if you haven’t done it before.  If you were a good budgeter in your working years, this will be a piece of cake. 

A monthly plan should suffice in retirement.   

FIXED EXPENSES VS. DISCRETIONARY EXPENSES

A best practice is to sort all your spending into two buckets – fixed or discretionary.  Let me show you how easy it is to plan your expenses this way. 

Fixed expenses are the items that you are obligated to pay each month.  This includes: 

·       Mortgages or rents 

·       Utility bills 

·       Car payments 

·       Car insurance 

·       Health insurance premiums

·       Food 

·       Phone, cable, internet, etc. 

·       Subscriptions 

·       Taxes 

Most of the items on your fixed expense list cost the same amount every month.  Some things like your electric bill may vary seasonally, but using an average is good enough. 

All you need to do is to add up your fixed expenses monthly.  As an example, your monthly fixed expenses might be $3,000. 

Everything else falls into the discretionary category.  Things like: 

·       Entertainment 

·       Travel 

·       Charitable Contributions (some put this into fixed expenses) 

·       Gifts for others 

·       Clothing (may be fixed for some) 

·       Furnishings 

·       Repairs and Maintenance

·       Uncovered medical expenses 

·       Other purchases 

These spending plans are highly personalized.  You can organize your spending in the way that works best for you.  There is no one-size-fits-all template. 

Let’s look at a simple example. 

This person needs about $30,000 to cover three months’ worth of expenses.  They are collecting $2,500 per month in Social Security or $7,500 for three months.  They would need to withdraw roughly $22,500 ($30,000 less $7,500) quarterly from their 401K account to cover their expenses.

In this example, this individual will need to withdraw $87,000 annually ($117,000 less $30,000 Social Security) from their retirement account.

The next step is to compare this number to your 401K retirement income forecast to see how they match up.  Hopefully, the retirement forecast supports an annual withdrawal of more than $87,000.

Now that you know how to do this, you should create your own spending plan and see if your 401K forecast covers your spending needs. 

IDEAL VS. MINIMUM SPENDING

In your first several years of retirement there is a risk factor called the Sequence of Returns.  If your investment returns are below average in the first 5 years or retirement, it can potentially reduce your retirement income by as much as 15%.

A way to mitigate this risk is to create two versions of your spending plan– your ideal plan and your minimum spending plan.

Your ideal plan includes your fixed expenses plus your ideal discretionary spending – all the travel and other purchases.  Your minimum spending plan would include your fixed expenses and a bare minimum of discretionary spending. 

The example above would be an ideal spending level of this person.  It includes $14,400 in discretionary spending for this three-month period.  A minimum discretionary spending plan might be $10,000 for this three-month period.  The minimum amount might reduce the amount of your travel or other purchases over this time period.

To be sure that you don’t run the risk of running out of money in retirement you need to know your minimum spending needs. 

If you get lucky in the early years of your retirement and participate in a strong bull market, you can spend closer to your ideal spending level.  If stock market performance is weak in the first several years of retirement, you can offset the risk by sticking to your minimum spending plan. 

Stay Disciplined My Friends,

Phil

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