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Understand Your Expenses

Getting a handle on your lifetime expenses provides an idea of how much retirement will cost and what you need to fund it. To identify that number, it’s best to group expenses into non-discretionary spending (living expenses, debt payments, taxes, insurance and healthcare costs) and discretionary spending (travel, entertainment, gifts, etc.).

When accounting for non-discretionary spending, consider whether you plan on relocating in retirement. If so, explore living costs in the new area and calculate a moving fund should your savings require it.

Healthcare costs take a more sizeable financial commitment the older you get. When it comes to health, it’s best practice to overestimate the cost of health care and think long-term.

Discretionary spending is more variable and flexible than expenses like housing or taxes. These indulgences may come from savings, investment accounts, employee benefits, or employer obligations. Are you able to reduce or even eliminate these discretionary expenses if times get tough? Are you willing to make do with less? Anything that can’t be cut should be considered non-discretionary and included in your retirement plan.

Inflation can erode your purchasing power over time, so you should account for it in your retirement planning. Inflation averages around 3% a year for US consumers. Retirees can also face substantially higher expenses that grow faster than inflation. It’s a good idea to factor inflation’s effect into your calculations for your future expenses.

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Evaluate Your Income, Investments and Retirement Accounts

Cataloging your income sources shows you how much money you’ll start with to pay for retirement expenses. Begin by tallying your non-investment income: Social Security, pensions, residual business income, and earned income—if you or a family member plan to work part time, for example. The gap between this accumulated wealth and your expenses is what your investments must fill.

Next, incorporate your investments and non-cash accounts into your potential sources of income. Make sure you have a handle on the details of your potential pension payments, retirement account withdrawals, employer obligations, and other long-term sources of income.

After considering your investments and expenses, you will also want to consider the pool available to you that you built up during your career. As an employee, you may have received some employer-matched funds in a 401(k), IRA, or other retirement account. You may have also contributed to individual retirement accounts like an individual IRA or a Roth IRA. While these IRA options can provide cash flow, you need to have a handle on the difference between employer-sponsored accounts, tax-free accounts, self-employed individual accounts, etc. You also want to verify the age and size of any individual accounts, such as a Roth IRA or a self-managed retirement account.

Don’t forget to account for tax implications when considering these account options and withdrawals. Each is different and comes with different tax consequences or withdraw penalties if done at inopportune times. Fisher Investments may be able to recommend a tax expert that can help you determine the optimal asset allocation and withdrawal schedule to keep your money in your hands.