Get started on your retirement plan

Are you getting closer to retirement? Tired of the daily grind and looking forward to some restful days ahead? Dreaming of endless trips or playing golf every day? Before you can enjoy all that retirement brings, it’s important to take a hard look at your finances and make sure they’re ready for your golden years. Let’s dive into what you need to know before retiring.

There is no perfect formula for how much you should save to be comfortable, but you need to be sure you have enough that you’ll never worry about running out. Just like any other financial decision, there are many factors to consider.

Types of expenses

A prudent financial plan requires a good understanding of how much you will spend over the course of your retirement. Take into consideration three types of living expenses:

Needs vs. wants

Needs are essential for survival, while wants are not. Needs refer to the basic requirements for a person to lead a healthy and satisfying life, such as food, housing, clothing and health care. Wants generally refer to items or services that give us pleasure or satisfaction but which are not essential for survival. For example, a second home or luxury travel is not essential for survival, but it may be something that brings you joy.

Obviously, it is crucial to always make sure you have enough money to cover your needs. However, it is also important to designate an appropriate amount of your budget to spend on your wants, the things you love. Set a little extra money aside into a “guilt-free” account and be unapologetic about spending it. Because investing always carries risks, if the markets hit an unexpected patch of poor performance make sure you’re prepared to reduce your “want spending” until conditions improve.

Fixed vs. variable expenses

Fixed expenses are those that remain the same. Examples include rent or mortgage payments, car payments, minimum credit card payments and utilities. Fixed expenses typically consume a larger portion of your budget compared to variable expenses. Variable expenses, on the other hand, fluctuate from month to month and may include groceries, entertainment costs and clothing.

Unpredictable living expenses

Unpredictable living expenses in retirement may include medical emergencies, home repairs, children in financial need, accidents, natural disasters, etc. They may only happen once in a lifetime but could still amount to enough that they will cut into your retirement savings if you don’t plan accordingly. Set aside a separate fund for the possible, more significant expenses so that you can pull from that when the time comes rather than your retirement savings.

Factor in inflation rates

As we’ve recently learned, expenses are continuously increasing but not at the same rate. When projecting your future expenses, you should extrapolate your common expenses by +/- 3%, and medical expenses by +/- 6.5%. You may even consider modeling the occasional surge of inflation, such as the one we are currently experiencing. On the other hand, fixed mortgage payments will remain level.

Sources of income

Get clear on how much of your retirement income will be fixed versus variable. Fixed income usually comes from a pension, Social Security, rental income, etc. Having a consistent cash flow throughout your retirement years is extremely beneficial. Your variable income would be from less predictable sources, such as withdrawals from an investment portfolio.

Formulas for retirement savings and spending

Some believe that there is a target dollar amount that you need to save for retirement. A rule of thumb suggests that folks should aim to save at least 1x their salary by 30, 3x by 40, 6x by 50, 8x by 60 and 10x by 67.

Another formula commonly referenced is the 4% rule. It is a guideline for determining how much of their retirement savings an individual can safely withdraw each year. The rule suggests that retirees should withdraw no more than 4% of their portfolio value in the first year of retirement, and then increase each subsequent year’s withdrawal amount by the rate of inflation.

This way, if investments perform well, retirees can benefit from having withdrawals that keep pace with increasing costs. If investments don’t do so well, retirees will be able to maintain a consistent living standard due to inflation-adjusted withdrawals. 

Now put your plan together

Now that you understand all the expenses and income you may have in retirement, as well as some factors to consider when estimating those costs, it’s time to start putting your plan together. Keep in mind that your goal is to create a thoughtful financial plan that meets all of your needs and empowers you to start enjoying your money.

With careful consideration and advice from a trusted financial professional, you can confidently move forward into this next stage of life feeling prepared for whatever comes your way.

This article was written by Mark Colgan from The Street Retirement and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.