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Balancing Spending and Saving in Retirement

Balancing Spending and Saving in Retirement

| June 24, 2022

Living off a fixed income in retirement can be difficult. How do you live out your golden years to the fullest when you have to make sure you aren’t living beyond your means? Below we discuss how to balance spending and saving in retirement.


The key to balancing spending and saving is creating a budget. While budgets are not necessarily glamorous, they’re extremely important to create when you start your retirement.


To start building your budget, look at the big picture. Consider your essential expenses, guaranteed income, and discretionary spending. This will give you an overall picture of your must-have expenses, sources of income, and what you want to spend your money on before getting into the nitty-gritty.


You need to cover your necessary expenses first to ensure you are prioritizing your needs before your wants. It can be difficult trying to estimate your expenses at the beginning of retirement so utilizing statistical averages is a great place to start.


Your main expenses will be housing, health care, food, transportation, and entertainment. Housing is the largest chunk of your expenses, estimated at 35% of your spending. Health care is averaged at 15% of your spending, but this depends on your health insurance coverage and out-of-pocket costs. Food is estimated at 15% of spending but this should be quite consistent with your food spending prior to retirement. Transportation costs average around 16% of spending because even though you are no longer commuting to work, you will still be using your vehicle.


Once you have your necessities taken care of, you can move on to your discretionary spending which will cover your travel, entertainment, hobbies, and more. How you decide to budget travel depends on what type of trips you want to take. If you are planning for short getaways, you should build a monthly expense into your budget. If you are planning for one long vacation, take a portion of your income each month to put towards a vacation fund. For entertainment, estimate what you are planning to do throughout the month and set aside a specific amount each month for the costs.


To keep saving throughout retirement, you should stick to the 4% rule. The 4% rule states that you should withdraw 4% of your total retirement savings in the first year of retirement. After the first year, you can then determine how much you actually need to live off of. When determining the new amount for annual withdrawals, be sure to include the inflation rate.


You’ll also want to time your withdrawals well. If you withdraw a large amount of money from your retirement accounts when the stock market has tanked, you will have to take out more money to cover your expenses with a portfolio drop. It will also be more difficult for the rest of the money in your accounts to bounce back. Aim to withdraw when the stock market is in great standing.


To allow your savings to continue to grow and earn as you begin to withdraw, you’ll want to adjust your asset allocation. Most people in retirement prefer to switch to a more conservative investment portfolio consisting of well-diversified stocks and bonds. For a better asset allocation, you’ll want to connect with a financial advisor for assistance.


Finding the balance between spending and saving in retirement can be difficult without a knowledgeable financial advisor on your side. Our advisors at Plan A Wealth Management are here to help. Schedule your consultation with us today.