Your First Year of Retirement: Do You Know How Much You’ll Be Able to Spend?

Some of it is natural; retirement is a big lifestyle change and many people question whether they’re spending too much during that first crucial year.  Surprisingly, freedom can be very expensive.  But that nervousness may also be an indication that an individual hasn’t received as much instruction in how he or she will spend during retirement as that person received saving for it.

A huge nest egg—or a nest egg that seems huge—sounds great. But the death of traditional pensions and the rise of (often underperforming) self-directed retirement plans have made it tough for individuals to easily predict what they’ll actually have to spend. And without a complete plan that takes into account personal circumstances, financial goals, inflation, the rising cost of healthcare, increased longevity and ultimately long-term care, retirement money probably won’t last as long as you do.

As the official baby boomer retirement wave begins, some financial advisers have begun to elevate the discussion to postretirement spending and investing as a way to repair preretirement planning. Individuals who have worked with financial and tax advisers, including Certified Financial Planner professionals, should have a much clearer picture of how they should manage their spending in the first five years of retirement.  

If you haven’t, it’s time to get some help.

For potential retirees who want to eliminate those first-year jitters, here are planning ideas to implement as soon as possible:

Define a vision of retirement and revisit it every year. Those who have worked successfully with an investment manager or financial planner have addressed the kind of retirement they want and how old they’ll be when they start it. A retirement that includes world travel and a general increase in leisure-time spending may, believe it or not, cost significantly more than a preretirement lifestyle with a 60-hour workweek built in. A retirement with rewarding part-time work built into the picture might make the other goals more affordable. A person who manages his or her finances or works with an expert needs to revisit those goals annually to assess whether he or she will still be able to afford a particular style of retirement at the age that person plans to start it.
Track working-life expenses for three to six months. This is where that vision of retirement starts getting real. Knowing for the first time what an individual spends on lattes and late-night carryout may cause a radical shift in behavior—from spending to saving.

Create a worst-case health scenario. For many, the biggest spending issue postretirement is end-of-life care. That may mean paying for expensive experimental treatments to fight disease or long-term assisted or nursing home care. Some projections put annual nursing home costs at more than $100,000 a year in the next two decades compared with their current annual range of $45,000 to $60,000. While public aid picks up medical expenses for those who exhaust their assets in most states, most of us want more than minimal standards of care.

Build several annual budgets. There are many rules of thumb that govern retirement spending. A popular one is that no one should spend more than 4 percent annually of the present amount in one’s nest egg.  Another is that retirees only need 70 to 80 percent of their last working year’s income to be comfortable. There really is no one-size-fits-all solution because spending decisions are different at all stages of retirement. Since computers make this possible, every investor might consider doing one or more annual budgets that build various risk scenarios into his or her plan.

Shift into a retirement investment strategy in stages. With a clear majority of investors having inadequate retirement funds in place near or at retirement age, it may seem silly to talk about investing postretirement.  But the younger an investor is, the more valuable the conversation.  With so many portfolios yet to recover from the 2000 – 2002 stock market slide, many investors have shifted their portfolios into real estate or other fast-growing investments that may leave them undiversified and subject to bubbles. Good advisers can help build more balanced portfolios that fit the exact needs of the investor as retirement nears.  

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

CFP®, CERTIFIED FINANCIAL PLANNER™ and the federally registered CFP (with flame logo) are certification marks owned by Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Tom Small is a financial and estate planning specialist offering investment advisory Services through PensionTrend Investment Advisers, LLC in Okemos. Small has more than 18 years’ experience and specializes in retirement and estate planning strategies for high net worth individuals. He is a registered representative of Cambridge Investment Research, Inc, a registered broker-dealer, Member NASD & SIPC. PensionTrend and Cambridge are not affiliated.








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