Today, most retirees depend on a combination of Social Security and distributions from a 401(k) or IRA to pay the bills. Unfortunately, pensions supporting workers into their golden years aren’t commonplace anymore and it can be intimidating to figure out how to budget for a long retirement.
Evaluate Your Financial Plan
There are a lot of things that people dream about doing in retirement. Some people have high hopes of moving someplace warm or relocating to be closer to their children and grandchildren while others look forward to enjoying downtime at home and acquiring new hobbies and interests.
If you’re unsure about whether or not you can afford to take the vacation you always dreamed of or spend the money to move closer to your kids in retirement, you might be tempted to live as frugally as possible and forget about the things you always hoped you’d do. The truth is, you might be selling yourself short. Reevaluating where you stand financially helps you figure out what you can afford to do while also planning for expenses in the future.
You've probably been contributing to your retirement savings your entire working life. Once it’s time to switch from saving assets to spending them, it’s not always an easy transition to make. Remember, that’s exactly why you started saving for retirement in the first place and it’s okay to spend as long as you have a sustainable plan.
How to Manage Your Finances in Retirement
Here are a few things you can do to feel more comfortable with your finances after retirement so you know what you can spend and how much to save.
Put together a baseline retirement budget
Most of your fixed expenses stay the same after retirement so there are still a set number of monthly bills you’ll have to pay. Some of these include a mortgage, car payment, food, gas, insurance, utilities, and health insurance and medical costs. These costs are unlikely to change much and should serve as the foundation of your expenses. To make sure you have enough to cover these payments, look into investing in things that don’t have a lot of risks and can produce an acceptable amount of return over a longer period of time.
Make a list of the things you really want to do
Some people wait until retirement to take their dream vacation or move to a warmer climate but your goals can also include things like buying a new car, updating your kitchen, or adding a deck to your house. It’s important to be realistic. You probably won’t be able to relocate, take your dream vacation, buy a new car, and pay your monthly bills without overspending but you can prioritize the things that mean the most to you and try to accomplish as many as possible. Figure out the major expenditures you plan to make in the first 10 years of retirement and invest that money in something that’s easy to access without being too susceptible to market fluctuations.
These days, everyone knows how risky the markets can be and how quickly they can go from up to down. This is undoubtedly a major source of the fear most people have about spending during retirement. You might be hesitant to take money out to fund a dream vacation or new kitchen cabinets when you’re unsure of what will happen in the future but you can plan for this, too. After you’ve budgeted for your regular expenses and figured out which of your major retirement goals are achievable, the remaining portion of your savings should be invested in a risk-based portfolio aimed at growth for long-term financial wellness.
Make the Most of Your Retirement with a Solid Financial Plan
The key to enjoying your retirement without being afraid of spending money lies in developing a realistic retirement budget that factors in both your necessary expenses and the things you want to do to enjoy yourself. This can be a little daunting to do on your own but talking to a qualified retirement planning professional can help you come up with a solid plan. You’ll set your mind at ease and be able to make the most of your retirement.
Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation . Any opinions are those of Tom Fleishel and not necessarily those of Raymond James.