It's a truism of retirement planning that you'll spend less after you retire. But while that truism may be true for many people, new research by the Employee Benefit Research Institute shows that nearly half of retirees increase their spending immediately following retirement, in many cases by more than 20%. Here are three ways you can get a better handle on your retirement spending and monitor it so you don't outlive your savings.
1. Make a detailed retirement budget. The old rule of thumb that you'll only need to generate 80% or so of your pre-retirement income to cover your expenses in retirement may be okay for estimating how much you need to save each year during your career to build an adequate nest egg. But once you're within 10 or so years of retirement, you need to get a more accurate fix on how much you're likely to spend. And the best way to do that is to create an actual retirement budget.
This budget doesn't have to be accurate down to the penny. Indeed, for many expenses you'll be making the best estimate you can, subject to later revisions as your life in retirement unfolds. That said, you do want to gauge your potential living expenses as meticulously as possible, especially in such major areas as housing, everyday living expenses and health care.
There are several free online interactive budgeting tools that can help. With BlackRock's Retirement Expense Worksheet, for example, you can enter more than 50 separate expense items in eight categories ranging from household and medical costs to outlays family care and "activities" (travel, entertainment, dining out, etc.). Fidelity's Retirement Income Planner tool contains a similar worksheet that, in addition to having slots for dozens of expense items, allows you to designate an expenditure as essential. Knowing what portion of your living costs are essential vs. discretionary can give you a better idea of how much wiggle room you'll have for trimming spending later on should you need to do so.
2. Do some "lifestyle planning." How much you spend—and what you spend it on—will depend in large part on your particular financial circumstances and the retirement lifestyle you lead. Which is why you'll be able to get a better handle on your likely expenses if you combine the budgeting process with what I like to call lifestyle planning—that is, thinking seriously about how your life might change and how you'll actually live once you're no longer bound by the workaday routine.
Do you plan to stay in your current home or downsize to smaller, less-expensive digs? Are you thinking of relocating to an area with lower living costs? Have you considered taking on part-time or occasional work in retirement? Will you travel extensively or spend more time cultivating new hobbies and interests? These are the sorts of questions you can ponder on your own or explore at retirement lifestyle seminars and workshops like the Creative Retirement Exploration Weekend offered by the Osher Lifelong Learning Institute at the University of North Carolina-Asheville. The more specific you can be about how you'll actually live after you retire, the more realistic your retirement budget—the happier your retirement—will be.
3. Monitor your spending and tweak if necessary. No matter how much work you put into it, no budget is going to be 100% accurate. But that shouldn't be a problem as long as you update it every year or so. Revisiting and revising your budget so that it reflects the latest information on your spending and lifestyle will allow you to do two things.
First, you'll be better able to track your outlays, so you can identify areas where you may need to cut back spending as well as ones where you may be able to spend more freely. Second, and more important, by plugging your revised spending info into a retirement income calculator that estimates how long your savings will last, you can get a sense of whether your current rate of spending is sustainable throughout retirement. If that appears unlikely, you can see how various cutbacks can improve the odds in your favor.
Bottom line: There's no way to eliminate unexpected expenses and surprises when it comes to retirement spending. But the more time you put into creating and occasionally revising a retirement budget that reflects your actual lifestyle, the better you'll be able to control your expenses and come up with a viable retirement income plan.
Walter Updegrave is the editor of RealDealRetirement. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at email@example.com. You can tweet Walter at @RealDealRetire.
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