Controlling the Controllable: Planning Your Retirement Spending
I believe that your retirement equation breaks down into three parts: things that you have total control over (such as how much you save and where you put those savings and investments); things you have some control over (how long you work); and things that you have no control over (short-term market returns, government policy).
Your retirement spending is a big focal point when we’re working with our clients at Keen Wealth. This process may initially feel restrictive at times, but approached prudently, we have found this to be one of the most fun and exciting pieces of the planning process. On today’s show, we discuss four important spending considerations that should factor into your retirement plan.
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Insights from Today’s Podcast on Controlling Retirement Spending
1. Where will your money go?
JP Morgan conducted a recent study that broke down how people over 65 spend their money. Unsurprisingly, travel, health care, and housing accounted for a big chunk of retirees’ spending.
If you’re a regular listener, then you know that I’m a big proponent of talking with a health care professional about the Medicare options available to you once you transition away from your employer-subsidized health care plan. Likewise, I’ve mentioned more than once that while paying off your mortgage before retirement can be a welcome luxury, refinancing to a fixed-rate mortgage that’s covered by your budget can also be a smart strategy.
But one surprising result of the JP Morgan study is that housing costs EXCLUDING mortgage payments accounted for 30% of retirement spending. Taxes, utilities, insurance, home repairs – these costs don’t go away once your mortgage does. If your retirement plan doesn’t include a move away from the family home into a maintenance provided community, make sure your spending plan allows for these bills and upkeep, especially if you’re living in an older house that’s going to need some TLC sooner or later.
2. Accounting for inflation.
Preservation of purchasing power is one of the largest risks we see retirees face at Keen Wealth. Naturally, seniors want to enjoy the same lifestyle to which they’ve always been accustomed, especially during the period of their lives when they should be enjoying a “reward mentality.”
In order to maintain a desired level of purchasing power, it can be extremely helpful having an asset base that, at minimum, keeps up with the rate of inflation.
Once again, health care is a key spending area. At Keen Wealth, we strive to incorporate a higher than average inflation rate as one way of anticipating client needs, as well as review any unique health care factors.
The rest of your common retirement spending categories – food, clothing, housing, transportation, entertainment – are inflating below the long-term average of 2.9%. That’s not a worrisome level of inflation, but it’s not insignificant either when multiplied across twenty or thirty years of a typical retirement.
3. Replacing your income.
Easily the most common question we get from new clients at Keen Wealth is, “How much money do I need to retire?” There’s no one-size-fits-all answer to that question, especially as the very nature of retirement continues to change and become more specific to the unique lifestyle goals that individuals have.
I can allay one common worry: there’s a misconception is that you may need to replace your entire pre-tax salary, dollar-for-dollar, with what you’ll be earning from your investments and Social Security.
JP Morgan found that most retirees end up generally spending 5% less in retirement than they do when they’re working. Also, on average, 9% of a person’s pre-retirement income goes towards pre-retirement savings. Once you retire, you won’t be paying FICA anymore, and you’ll probably be finished paying for life insurance. And finally, most retirees also end up paying 14% less in taxes.
Based on these figures, that potentially adds up to a 28% reduction in pre-tax spending. It is possible that if you consider replacing 72% of your top-line working income with retirement income, it could equate to about the same after-tax income level. If you’ve been planning with a fiduciary advisor, your savings, investments, and Social Security payments, coupled with the reduction in general spending and taxes could potentially hit that percentage. Everyone’s situation is different, and it is important to review your personal financial goals with a finance professional.
4. Preparing for the unexpected.
Occasionally, a motivated new investor will walk into my office with a thirty-year spreadsheet explaining exactly how much income they plan to generate from their investments in retirement, and how much they’re going to withdraw per annum.
If only your money, or your life, were that predictable …
Over the course of those thirty years, volatility will have a say in each. The markets will have peaks and valleys. Your retirement lifestyle and spending will change, for good reasons, like a surprise splurge vacation, and tough reasons, like needing to move a spouse into a nursing home.
That’s why the Keen Wealth financial philosophy puts so much emphasis on controlling the things we can control. Of all the levers we can pull to adjust retirement plans, helping our clients keep their spending in a good place has the biggest, and most immediate impact. Control what you can while you can, and the uncontrollable things you’ll face in retirement won’t prove nearly so threatening to your long-term spending plans.
Bill Keen on Spending ...
“Controlling the things we can control in your financial plan starts with your spending levels."
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About Bill
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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