Part of having an active “retirement spending plan” means you need the income to support it. That can mean a lot of different things depending on how you define retirement.
Traditionally, retirement has meant that you work up to a point, cross a hard line in the sand, and stop working. Today’s retirees are much less likely to take this approach. Many Boomers are opting instead to work part-time in careers they find rewarding or start businesses in an industry they love. Regardless of how abrupt or gradual retirement is you need to ensure that your plan is financially feasible.
With a good plan for supporting yourself in retirement, you may even find that you have more freedom to pursue work that you enjoy, travel, or spend time with family.
You’ve likely saved for retirement over your entire career. But how do you make the switch from saving for retirement to spending in retirement? After all, that is the point of all that saving.
Start by thinking about your expense needs in retirement. Look at what housing, food, travel, healthcare, and whatever else you plan on spending for will cost. This takes some time but is well worth it. Once you have an estimate of what you’ll need to support your retirement lifestyle you can do some backward planning to figure out how much you need from savings. If you take the time to do this step you’ll be much better off.
How Much Do You Need in Savings?
Are you sure you have enough in savings to support your estimated expenses in retirement? The question is simple enough, but there isn’t any single best answer. The way you spend from your retirement savings is just as important as how much.
Because everyone is different, there are many different methods. A good starting point and the most popular method is the 4% rule of retirement income.
Although there is a lot that goes into the 4% rule of retirement income, the rule itself is stated simply enough. Withdraw 4% of your savings at retirement and adjust your withdrawal every year for inflation. In other words, if you have $1,000,000 in savings you can withdraw $40,000 in that first year. The next year, increase that amount by inflation.
The backward planning would look like this…
Figure out how much you need to support your retirement lifestyle. Next, subtract out any sources of income. This could be income that you’ll still be receiving from a new, enjoyable, part-time job. If you are already drawing Social Security, that counts too. The remainder would need to be covered from savings withdrawals. Provided the annual amount isn’t more than 4% of your savings, you are good.
Suppose you need $8,000 per month. If you make $4,000 per month from working and have a $2,000 monthly Social Security benefit, you would need to withdraw $2,000 per month. That is $24,000 per year.
In this specific instance, you would need to have $600,000 in retirement savings to support a $24,000 withdrawal if you use the 4% rule.
Make sure you account for the fact that you will at some point stop working
This could involve planned reductions in spending later in life or new sources of income such as selling an inherited property.
Most retirees are more active early on and therefore spend more. Most of us won’t still be taking Ski trips when we are 85.
It could also involve paying off a home and therefore no longer having a mortgage payment or selling a business you’ve built.
However you handle it, just have a plan that accounts for it.
How do you plan to enjoy your retirement? Do you have a plan in place? Please leave a comment below.