Planning for retirement is a pivotal life stage. The five years before retiring can be filled with both excitement and apprehension. You might be asking yourself whether you’ve saved enough to be able to retire. How can you know?
Creating a retirement spending plan before you retire will help answer that question so when you do decide to transition into retirement, you will be able to confidently balance financial independence with personal fulfillment.
Why a Retirement Spending Plan Matters
A solid retirement spending plan ensures your hard-earned wealth supports your desired lifestyle. If you have a comfortable lifestyle with a healthy income and investments, the stakes are even higher. Without a plan in place, even a sizeable nest egg can fall short when under inflation, unexpected expenses, or market downturns.
This phase before retirement is about transforming apprehension into empowerment. A spending plan provides clarity so you can focus on enjoying the fruits of your labor.
Step 1: Assess Your Retirement Goals
Visualize Your Ideal Retirement - Start by imagining your retirement lifestyle. Will you travel extensively, support family, or invest in hobbies? Discuss these dreams with your partner and come together on what the future together will look like.
Quantify Your Goals - Assign realistic costs to your goals. For instance:
- · Annual travel budget: $15,000
- · Hobbies and memberships: $10,000
- · Health care costs: $7,000
Step 2: Understand Your Current Financial Picture
Calculate Your Net Worth - List all of your assets (investment accounts, real estate, etc.) along with all of your liabilities. Knowing your net worth helps you gauge your financial starting point.
Evaluate Income Streams - Identify sources of retirement income, such as:
- · Social Security benefits
- · Pension payouts
- · Investment withdrawals
Use a tool like SSA.gov to estimate Social Security benefits based on your income level.
Review Your Expenses - Track current expenses to understand your spending patterns. Looking at your bank and credit card statements are a good starting point.
Categorize expenses into needs (housing, health care) and wants (travel, dining out).
Tip: Couples often underestimate health care costs. Research Medicare options and supplemental insurance plans.
Step 3: Build a Retirement Savings Plan
1. Determine Your Annual Withdrawal Rate –Financial advisors often recommend the 4% rule: withdraw 4% of your portfolio annually to make your savings last. For instance, for a $1,000,000 portfolio, this translates into $40,000/year. Learn how investment rates will impact your retirement.
2. Align Investments with Your Goals –Your investment strategy for retirement should evolve. As retirement approaches:
a. Prioritize wealth preservation strategies: Rebalance your portfolio by shifting a portion of assets to lower-risk options. Consult a Certified Financial Planner® to help you choose what investments are best for you and your financial plan.
b. Maintain growth potential: Keep some equities to counter inflation and provide growth.
A balanced portfolio is key to sustaining wealth over decades.
3. Plan for Inflation –Inflation erodes purchasing power. At an average of 3% annually, expenses today will double in 24 years. Include an inflation-adjusted buffer in your spending plan.
Example: If your annual spending is $100,000, budget $103,000 for the next year and increase this yearly if your spending remains the same.
Step 4: Address Emotional and Lifestyle Challenges
Embrace the Transition –Retirement is more than financial. It’s also a huge emotional shift. You’re moving from earning to spending; from structure to freedom. Couples often feel anxiety about this change. Remember to:
- · Have Open Communication: Discuss fears and expectations with your partner
- · Seek Guidance: A financial planner can help you create your spending plan while providing you with reassurance and accountability.
Redefine Your Identity:Work often defines us. In retirement, you will need to rediscover purpose. Consider volunteering, mentoring, or learning new skills.
Prioritize Health and Relationships:Good health and strong connections are vital for a fulfilling retirement. Make wellness and time with loved ones a priority in your plan.
Step 5: Monitor and Adjust Your Plan
A retirement spending plan is not static. Regularly review and adjust based on:
- · Market performance
- · Lifestyle changes
- · Unexpected expenses
Tip: Schedule annual plan reviews with your financial planner.
Common Retirement Planning Pitfalls (And How to Avoid Them)
1. Underestimating Longevity - Plan for at least 30 years of expenses. Your financial planner should be able to run projections to help you plan for the many years ahead.
2. Neglecting Health Care Costs - Budget for rising premiums and long-term care.
3. Overestimating Investment Returns - Use conservative growth projections to avoid shortfalls. Again, your financial planner should be able to provide this service for you.
4. Failing to Adjust Spending - If advised, adapt spending habits during market downturns.
Final Thoughts
Creating a retirement spending plan is a journey of self-reflection, partnership, and strategy. By taking proactive steps now, you can confidently transition into a retirement that seeks to sustain your financial well-being and fulfills your dreams.
Remember, it’s not just about number. It’s also about living the life you envision while protecting your financial future.
If you need assistance or would like to learn more about creating a retirement spending plan, consider working with one of our Certified Financial Planners (CFPs®) at MANIFEST. Contact our offices by calling (763) 593-0649 in Maple Grove, MN or (952) 882-0400 in Lakeville, MN. We can also be reached by emailing info@manifestplanning.com, or simply schedule online.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.