Budgeting for the Unknowns of Retirement

Over the years, you and I have spent a lot of time talking about the challenges of preparing for retirement. That is because there are lots of variables to consider, many of which are outside of our control. For example, market volatility, risk-budget, investment process, taxes, inflation, healthcare costs, and more. All of these things can impact how much money we’ll end up with once we retire.  This is important folks since in our distribution phase of our financial lifecycle we need our assets to provide income in retirement. Part of the retirement planning process is navigating these factors so that we have the assurance that our money will provide the income we need to meet our expenses in retirement.

But before we even start that process, we need to know what our end goal is – that is, what will our expenses actually be in retirement? How much income do we need to have, month in and month out, to make sure the bills are paid, and we can enjoy retirement the way we want? If we don’t know this, it’s virtually impossible to create a retirement income plan that has a reasonable chance of success.

This may seem elementary, but you’d be surprised how many folks haven’t really sat down and crunched the numbers for this critical first step. I recently met with some folks, a couple I’ll call them John and Suzanne from Cataumet. They’re both around my age, middle 50’s, and still working full-time.  They wanted some help constructing a sound retirement system. They had done an admirable job accumulating money within their company 401k plans, and also had a decent amount of assets in a brokerage account. They were empty nesters who wanted to make sure their kids had a legacy and their grandchildren’s college education was taken care of, while still having enough for themselves. Suzanne had always wanted to travel internationally, so it was important that they build this into their retirement budget.

Once they settled in, John immediately started asking me how they should structure their money as they near retirement. He wanted to know if I thought they should convert their 401k into a Roth IRA. I was a little surprised at this and suggested that we take a step back. I then asked them how much income they think they’ll need each month in retirement. They looked at each other for a moment, and then Suzanne said, “Well, I think we will want the same amount that we make now. Isn’t that the norm?”

I explained that it isn’t usually that easy. Your income needs in retirement will depend on a number of factors and will vary widely from one person or couple to the next. We can’t even begin to structure your assets until we know how much income your assets will need to produce each and every month. Just “winging it” and hoping the amount of money that allowed you to live comfortably pre-retirement will be the same as your post-retirement years is a recipe for disappointment – and anxiety. And if you search the topic online, you’ll find a lot of different answers. Some “experts” say you should expect to spend the same amount or more while others suggest that your spending will go down dramatically in retirement. So, who’s right? Well, let’s take a look this week at some factors you’ll want to understand as you develop your retirement budget.

Unfortunately, there is no one right answer. It all comes down, in part, to your unique situation and how you envision spending your retirement. But recent studies have also identified two common factors that tend to strongly influence your spending habits in retirement. In fact, researchers at the Center for Retirement Research (CRR) at Boston College recently explored the “consumption rates” – a fancy term for spending rates – of retirees and identified some significant long-term trends. While retired households tend to decrease their spending over time, the CRR study₁ found that two factors play key roles in determining just how much retirees curtail spending throughout retirement: levels of wealth and health.

This is interesting . . . the CRR determined the average retired household cuts its spending by 1.5-1.6% per year throughout retirement, which translates to a decrease on household spending of an average of 0.75-0.80% for retirees, reaching double digits twenty years into retirement.

They noted that financial planners and researchers have historically assumed retirees prefer to maintain their pre-retirement standard of living. However, their data shows this is more likely to actually occur for wealthy and healthy households. It may not be surprising to hear that the average household spends less when retired compared to their pre-retirement years, but the health and wealth levels of retirees helps explain the long-term consumption patterns that the CRR researchers identified. Those with greater wealth, as well as those who reported their health as “very good” or “excellent” saw their spending rates drop by 0.65% per year, while the consumption rate of those who report being in “fair/poor” health declined nearly twice as fast, 1.5% per year

So, what does this mean for you? Well, aside from taking the time to estimate what your retirement expenses will be – by creating a budget – you should also consider other factors that influence how much money you think you’ll spend and perhaps adjust accordingly. After all, if you plan on paying for a weekly golf round into your 90’s but have, for example, early onset arthritis, you may need to consider that your body may not be able to keep up with the sport forever. Create a budget that’s realistic and reasonable – and uniquely yours.

And as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com. 

Insurance products, including annuities, are offered through Cutterinsure, Inc., (MA insurance license #2080572). Cutter Financial Group and Cutterinsure are affiliated and under common control but offer services separately. Members of Cutter Financial Group’s management receive revenue directly from Cutterinsure. Any compensation received is separate from and does not offset regular advisory fees. Cutter Financial Group does not charge advisory fees on any insurance products. We do not offer tax or legal advice. Always consult with qualified tax/legal professionals regarding your own situation. Investing in securities involves risk, including possible loss of principal. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Market data and other cited or linked-to content in this article is based on generally available information and is believed to be reliable. Please contact us to request a free copy of Cutter Financial’s Form CRS, Form ADV 2A and applicable Form ADV 2Bs. 1. https://tinyurl.com/y4p3ynfr