You take a look at your retirement savings and think you’ll be spending the same amount year after year. Why wouldn’t you? Most financial calculators treat retirement planning like a job, with a fixed yearly income. A fixed yearly income often isn’t the case, but that’s not a bad thing. Here’s what it will look like instead.
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According to Mike Pappis, a CFP® professional at retirement planning platform Boldin, your post-retirement spending should be about 80% of your pre-retirement income, something that’s agreed on by many financial planners. That’s a good starting point, but not a hard-and-fast number. Unexpected costs like car repairs, home improvements, or helping family financially often creep up. The 80% figure is a useful starting point, though many planners note it tends to underestimate early retirement spending and overestimate later spending.
If you think your monthly spending will be around $7000 comfortably, you may find that number doesn’t hold up in real life. That’s not a failure. Most people miscalculate, but it’s a fixable problem.
Related: The Real Cost of Downsizing in Retirement (It's Not What You Think)
Spending Has 3 Phases
You’ll naturally spend more in the first decade of your retirement than you will later. These are the fun years, the time when you’re moving, taking a dream vacation, and hitting all your bucket list items. The second phase is a mix of adventure and slowing down. Your third phase is when spending curbs but healthcare costs could rise.
If you plan for these three phases accordingly, spending more at the beginning while being mindful of the other two, then you’ll have a more accurate picture of your monthly budget. It’s ok to give yourself a little leeway in the first decade after retirement so you have time to enjoy the life you’ve built for yourself. Overall, research shows you’ll spend less in retirement than you did in your working years.
Related: There Are Three Phases to Retirement Spending, but Most People Only Plan for One
A Realistic Budget
To figure out what a realistic budget looks like for you, break your spending into essential and non-essential spending. Groceries are essential while dining out isn’t, but you want to have a mix of both, so you don’t feel like you’re restricting yourself.
If the market dips or you have more expenses one year, it’s easy to shave that extra money from your non-essential list. Knowing what you have to spend versus what you want to spend gives you a broader picture.
Your retirement budget won’t ever be a perfect number, but understanding your finances and how spending changes will help you get a more realistic view of how to plan. Once you have a firm grasp on how to use your nest egg, you’ll feel more at ease when it's time to splurge on something you really want.
Disclaimer: This article is for informational purposes only and does not constitute advice.
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