Retirement Spending

Some retirees plan to spend time traveling. This can mean visiting family, trekking across the country or taking trips overseas. If you plan to travel during retirement, don’t forget to account for the expenses involved. Relative to your pre-retirement travel, you may see an increase or decrease in travel spending.

Retirement is a perfect time to rekindle old hobbies or to spend time acquiring new ones. Whether you plan to put together an in-depth compilation of your family history, study art, go fly-fishing or play golf, hobbies often incur costs.

What is considered a luxury is subjective. It can be simple, like meeting your friends for coffee every morning. Or it can be more involved, like joining a country club. Whatever a luxury means to you, its costs should be part of your retirement spending budget.

Perhaps you plan to spend more money on your children or grandchildren through travel costs, education expenses, gifts or by passing on a legacy. Perhaps all of the above!

In summary, for each discretionary spending case, it’s important to consider how much growth, income or cash flow these goals will require from your investments. Be prepared to make some tough decisions on your discretionary spending if your non-discretionary obligations can’t be met.

Inflation is defined as a general increase in prices. This increase reduces your purchasing power over time. Inflation rates vary annually but average approximately 3% per year. 

That may not sound like much. But if that inflation rate continues and you need $50,000 now to cover annual living expenses, you’ll need about $90,000 in 20 years and about $120,000 in 30 years to cover those same expenses. It is important to be aware of inflation’s impact on your retirement spending plan.

Your investment time horizon is, put simply, how long you need your money to work towards your retirement goals. Factoring in your investment time horizon is essential to determining your total retirement costs.

Your investment time horizon may be the same as your life expectancy, or it may extend beyond your life if you want to leave a legacy. Regardless, your life expectancy and that of your partner’s plays an important role in a retirement spending plan.

Many people are living longer because of medical advances. To be safe, prepare to live a long time—longer than you expect—so you don’t run out of money during retirement, which may mean returning to work or perhaps making other tough choices. If you and your partner have different life expectancies, use the longer of the two to be safe.

If you haven’t already, perhaps speak with a financial planner to determine your investment time horizon and therefore how to best plan your retirement spending.

As most retirees know, spending habits throughout retirement can change as your financial needs and retirement goals change. Reviewing your retirement spending plan on a regular basis will help identify areas that need attention before they get out of control and keep your overall retirement plan on track.

If you don’t already have a budget, create a list of discretionary and non-discretionary expenses. Review your expenses with your financial planner. Reconcile your investment allocation with your desired income/cash flows and your investment time horizon to ensure you have the best possible plan for your situation.

Ensuring a successful retirement involves planning throughout your retirement years with a critical look at your discretionary and non-discretionary spending. Your non-discretionary expenses aren’t easy to adjust, but your discretionary expenses can and should be adjusted if you’re having trouble meeting essential living expenses in retirement.

Thorough planning for what you can predict, and building in a safety net for the unpredictable, will help you on your path to a successful, enjoyable retirement.