Last week I gave you the first strategy to securing income for life, comprised of three buckets to stretch your dollars as far as they will go. The next action to take in your retirement game plan is to manage your spending.
If you’re looking to make sure your nest egg last for decades, you need a plan. Sustaining your income through retirement typically calls for a 4% withdrawal in your first year. After that, adjust it based on inflation. Map out a strategy with your planner that will take into account your monthly budget coupled with your life expectancy. For example, let’s say you have $2 million in your retirement accounts. That means you can withdrawal $80,000 for that first year. Then if inflation is running at 3%, you would take out $82,400 to cover the second year’s expenses.
While the 4% isn’t a hard and fast rule, it is an excellent place to start. That number comes from historical market returns of portfolios split amongst stocks and bonds. Obviously, past performance is not an indicator of future performances. You may need to reduce your withdrawals if you are retiring early. Or perhaps a major expense pops up that your monthly budget can’t cover and you need to dig deeper into your retirement pockets. If appropriately invested and managing your spending, your chances of extending your retirement go up dramatically. However, if you need to cut spending all together to keep up with inflation, here are a few ways to do so:
Just like life before retirement needs budgeting, so does life after retirement and probably more so. There are fewer opportunities to create additional income. That’s not to say it isn’t possible because it is. However, retirement does mean a more limited spending budget for most.
If you’re older you may not be technologically savvy, but you probably have kids or grandkids who are. If so get their help if you’re feeling lost. Or perhaps force yourself to learn that way you can set your bills up to come out automatically. The last thing you want is to rack up late fees for missing payments. Most banks offer free bill pay now, so sign up and get your bills paid automatically. Amazon.com will even allow you to “subscribe purchase” and deliver some of those items you use every month, like paper towels or dog food.
The kids are all grown so why stay in that 3,000 square foot home? With housing costs topping most expenses for the average American, why not cut your house payment. Perhaps your house is paid off, and you stand to gain from the sale. You can buy or rent something smaller which will likely save in other areas such as electric bills. Whatever you do, aim to keep your housing expenses as low as you can.
With more time on your hands; it could be easier to think your spending habit through. Maybe learn to coupon. Or shop in bulk. Instead of buying a gift, utilize your extra time to make a homemade gift that others will adore.
Whatever you do as you head into retirement, managing your spending will be essential to the vitality you hope to experience in retirement.
If you have any questions about these options or want to discuss other financial questions you might have, we would love to talk to you.