Today’s financial world is filled with uncertainty – volatile markets, economic flux and political unrest. These variables impact the balances of our accounts daily, which can make anyone feel helpless in regards to financial security.
But most medical costs aside, the cost of basic living expenses (shelter, clothing, food) and entertainment is determined by you. The key to a sustainable retirement is to limit spending in the face of everything else that you cannot control.
Start planning retirement expenses early
Planning for retirement expenses can be a bit of a guessing game, because you don’t really know how much you will spend until you are actually retired. Careful budgeting before you retire can help you get closer to an estimate. To start:
- Itemize your current expenses and think about which expenses will increase (travel) or decrease (lunches out) in retirement
- Think about which expenses might go away (monthly parking at work) or appear (full health insurance)
Often, people believe their expenses will decrease as soon as they retire – which is far from reality. In many cases, this new sense of “freedom” leads to increased travel, home remodels and even relocation. As such, retirees frequently find that they spend more money in the first few years of retirement than when they were still working. Anticipating for these changes and saving more for the first few years will provide an extra cushion so that you aren’t completely dependent on your investment portfolio.
Where to start?
Spending can often get out of control when it comes to your home. For some, relocation is a retirement goal, which is perfectly attainable. But it is important to know what costs are associated with relocation. Start by researching the following items to factor into your future budget:
- Get an estimate on your new real estate taxes
- Find out the premium on your new homeowner’s insurance
- Look at an average utility bill for that region of the country
If you plan to stay put, think first before investing significant money into a home remodel:
- How long will you be there?
- Is it worth investing the money now?
- If you are traveling and your children aren’t nearby, do you still need to live in a large home?
- Even if the memories of a family home are important to you, is it worth the heavy costs of maintenance and the potential strain on your resources?
Gifting to your family
Spending in retirement can add up quickly when it comes to your children and other family members. Gifting can provide estate tax benefits and, more importantly, benefit a person you love who might be in need. These are fine reasons to share your hard-earned wealth, but this pattern can quickly get out of control and create a detrimental strain on your cash flow. When gifting, make sure that you are actually helping and not enabling that person to become dependent on your financial support long-term.
Consider “self-imposed” inflation
A hidden factor that can also increase your spending in retirement is inflation. In general, prices go up over time. However, it is important to decipher between economic inflation and self-imposed inflation. A properly balanced portfolio can help protect you against economic inflation. However, if you are spending more each year through your own choices, you are the only one that can eliminate the rising expense.
For example, you may feel that it costs more to travel now than it did ten years ago. Economically, this might be true. Or, is it possible that the increase is because of the “upgrade” you have been making to your vacations? The cost of eating out might be going up, but is the increase because you have now become a regular at an upscale steakhouse instead of the local restaurant up the street? If these examples sound familiar, economic inflation might not be fully to blame.
Prioritize, then enjoy
As your advisors, we are here to help you with the planning process. You’ve worked hard for a long time and deserve to enjoy those rewards in retirement. But it is important to understand the difference between wants and needs. Prioritize what is (or what will be) important to you, and understand how that will factor in to your spending. The market and economy might be uncertain, but the key to your financial security is in your hands – you just have to control it.
If you are not currently a client but would like to learn more about Truepoint’s services, please contact Lisa Reynolds. If you are a client and would like more assistance with this process, please contact your lead advisor.