Spending Your Money In Retirement
How to Spend Retirement Money
If you spent your entire adult life building a solid nest egg for retirement, you likely never thought about how you would spend it. Once you reach retirement age, it can be difficult to adjust from frugally saving your income to spending down your savings. Budget realistically to make sure you have enough to cover your expenses for the rest of your life. Then plan to enjoy what you saved, whether it's buying a boat or going on that dream vacation.
Budgeting Your Expenses
Total your annual housing costs.Housing is typically the largest expense for retirees. Even if you've already paid off your mortgage, you'll still pay for utilities, such as water and electricity, as well as property taxes.
- If you're still paying your mortgage, you might consider using money from your investments to pay it off so you no longer have that expense. That will greatly reduce your yearly expenses.
Average your yearly transportation costs.Transportation includes car payments, car insurance, and expenses for fuel and maintenance. This category is often the second largest expense for retirees.
- Some of your expenses, such as commuting expenses to work, will disappear when you retire.If you're married and have 2 cars, this may be a good time to consider selling one of your cars to reduce expenses.
Estimate your health care costs.While you can accurately estimate what you'll pay for health insurance and basic care, you may not know how much a sudden injury or illness could set you back. Round health care costs up to accommodate unforeseen problems.
- Retired Americans spend around ,000 a year on health care. If you live in a country with socialized medicine, your expenditures will likely be far lower.
Add up your usual food expenses.When calculating your food expenses, look at what you spend to buy food in a grocery store or supermarket. Don't include money you spend dining out at restaurants – include this in your miscellaneous or entertainment expenses.
- You can get an actual number for your food expenses by adding up grocery store receipts over the past couple of months. Multiply to get an annual figure.
- Round your food expense estimate upward to account for changes in prices and additional seasonal expenses, such as for holiday meals with family and friends.
Provide an allowance for other expenses.Many personal expenses related to work will disappear after you retire. You still want to allow for personal care items, nights out, and other entertainment. If you've got a healthy retirement nest egg, you may be able to spend a little more on entertainment and personal items than you were previously accustomed to.
- If you don't have the extra money to splurge, that still doesn't mean that you should scrimp or neglect self-care. Provide room in your budget to enjoy yourself.
- If you have enough set aside to more than cover your regular basic expenses, try new experiences such as massages or spa treatments for additional self-care.
Calculate your monthly income.Add up any government retirement benefits as well as any pension or other retirement benefits you'll get. If you plan on working part-time, or if you receive rental income from property, add that as well.
- If your monthly income covers your basic expenses, you may not have to take more than the minimum distribution from your retirement accounts. You can also use this extra money for big-ticket purchases or vacations.
Figure out how much you need to pull from your investments.The gap between your regular expenses and your monthly income is the amount you'll need to cover from your retirement and investment accounts.
- In the US, the IRS requires you to take regular withdrawals from your retirement accounts after you reach the age of 70 1/2. If you don't take the required minimum distribution from your tax-deferred retirement accounts, you could be on the hook for a 50 percent penalty.
- If you're required to take minimum distributions from tax-deferred retirement accounts, that may be all the money you need to take from your investments. However, you still want to include spending for "nice to have" things that you don't actually need for survival, if at all possible.
Review and adjust your budget each year.It can be extremely difficult to project how much you're going to spend over 20 or 30 years of retirement. Expenses you're used to having may disappear. Some costs may also rise due to inflation or other factors.
- Generally, your expenses are going to be more in your early retirement years than in your later retirement years.
- Increase your projected expenses at least 1 to 2 percent a year to account for inflation.
Enjoying Your Retirement
Open a dedicated account for medical expenses.Retirees frequently avoid spending money on more pleasurable or frivolous things because they're concerned about their health. If you set up an account specifically for unforeseen medical expenses, you may be able to spend without feeling so much stress.
- Research has shown a 65-year-old American couple will spend around 0,000 on health care after retirement. If you set this money aside, you won't avoid spending for fear that you won't be able to cover a medical crisis.
Set up a separate account for emergency expenses.Go back to your budget and calculate the total for 3 to 6 months of expenses. Set this amount aside in a separate savings account that earns interest as an emergency fund.
- Knowing that you have an emergency fund will make it a little easier for you to spend down your retirement savings without stressing out about the future.
Follow the 4 percent rule.The 4 percent rule provides that you should withdraw at least 4 percent of your retirement savings each year. If you are comfortable living frugally, you may not need to withdraw that much to cover your basic expenses. Use the additional amount to treat yourself to something nice or to a fun experience.
- Leave the bulk of your investments as they are, so that your portfolio will continue to grow, particularly during the early years of retirement.
- Provided you have more than enough in your investment accounts to cover your basic retirement expenses, go with a withdrawal rate of between 5.4 and 5.9%.
Set goals for large purchases and experiences.If you're accustomed to saving and living frugally, you may balk at spending a large amount of money at once. If you want to plan an international vacation or a larger purchase, research pricing and plan ahead to save each month towards that goal.
- For example, suppose you want to buy a boat. The type of boat you want is typically around ,000. If you budget savings of 0 a month towards the boat, you could buy it within 2 years.
- Setting these kinds of goals allows you to "save" in a way that you're comfortable with, while also making the big-ticket purchases that will enhance your retirement years.
Spend on things that bring you joy.During your working years, you likely avoided unnecessary expenses, particularly if you were focused on saving for retirement. After you retire, reassess what you spend your money on. Some things that seemed frivolous during your working years may be more necessary during retirement.
- For example, you may have always flown in coach or economy during your working years. Now that you've retired, the comfort of first or business class may bring you more joy and be more valuable to you than spending that money in some other way – especially if you're on long international flights.
- On the other hand, you may find that some things that gave you joy during your working years, such as the status symbols of designer clothes or luxury cars, are no longer important to you.
Protecting Your Legacy
Calculate how much money you need.Using your annual budget, figure out what the total amount would be for a 20- or 30-year retirement (depending on your age and health). You can consider any money in your investment accounts beyond that amount to be your legacy.
- You don't necessarily want to plan on leaving this entire amount to your heirs. You can still leave room to splurge on vacations or purchases to enhance your retirement experience.
- If you have difficulty figuring this out on your own, or aren't very confident with your result, you may want to reach out to a financial planner or estate planning attorney for advice.
Determine how much you want to leave your heirs.If you have a ballpark figure in mind for what you want to leave behind, you'll be able to spend more easily. If you have several accounts, consider creating a dedicated account for inheritance.
- If you're comfortable living frugally, you may be able to leave more to your heirs. However, you shouldn't deny yourself basic material comfort during your golden years just so you can leave more money behind for your family.
Set up a college savings account.If you want to leave money for your grandchildren, a college savings account can help pay for their education. The United States and other countries offer these plans as a tax-advantaged way to save for tuition and other college expenses.
- Your grandchildren won't pay any taxes on the money you invest in their college savings account, provided they use the money for qualified educational expenses.
- Setting up a college savings account is a way to ensure that your heirs spend their inheritance in a way that conforms with your own values.
Give freely to family or to charitable organizations.There is a saying that it is better to give with a warm hand than with a cold one. Even if you're uncomfortable spending money on yourself, you may still get joy by helping out family members in need.
- If there is a specific issue that you are passionate about, set up regular monthly donations to an organization dedicated to that issue.
- If you're able-bodied, you might also consider volunteering your time to assist in areas you care about. For example, if you are passionate about animal rights you might volunteer at a local animal rescue.
Video: Retirement Planning: "Retirees Reluctant To Spend Their Money"
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