How To Avoid Spontaneous Financial Decisions In Retirement
Retirement can last a long time. Depending on when you decide to retire, you could be living in your golden years for 30 years or more. Planning for your expenses a few decades at a time will take time, attention, and proper execution to give you the life you have always wanted.
Our goal is to help clients strive for the life they have always dreamed of and that requires a proper balance between saving and investing practices, strategies, and lifestyle planning. TFS knows that retirement is so much more than the money on your balance sheet, it is about the life you are able to build and live out each and every day. It is about living your values and focusing on those areas most important to your family.
To help you to reach your lifestyle goals, it is important that you create a retirement savings plan to help you live those goals and most importantly, to help ensure your funds last as long as you want them to.
One roadblock our team has seen over the years that stands in the way of that longevity planning is spontaneous, large expenses while in retirement. Today, we wanted to dig a little deeper into what we mean when we talk about being spontaneous in your spending habits and how to avoid it for a happier, more fulfilling retirement.
How spontaneity can strain your retirement budget
In small doses, spontaneous behavior can be fun and exciting. It is a great way to shake things up and bring new beauty to your life. An impromptu date night out or a surprise picnic with your spouse can be the perfect way to bring joy to an ordinary Tuesday.
But spontaneity often has the tendency to extend beyond the boundaries of fun and into an unsustainable habit to overspend. This line is thin and important to keep in mind especially for retirees.
Remember: a small expense can be fun. Overspending on something small every now and again in retirement isn’t necessarily bad. However, a series of small, unplanned expenses can be a red flag. Unchecked expenses can be devastating during a period of time where resources are limited, finite, and the ability to replenish is also limited.
When working with us, your retirement spending plan probably feels comfortable. Yet sometimes this sense of confidence can cause you to go a bit overboard on excess spending in your golden years. This might mean:
- An impromptu decision to relocate in retirement or split time between states
- A big home remodel
- A new home purchase or vacation house
- Consistent annual vacations for the whole family
- Other large purchases like a boat or motor home
All of these expenses are big-ticket items and can put a significant dent in your nest egg especially if you weren’t planning on that expense. Another issue with making such a large impromptu decision is the residual effects it can have on other areas of your life and financial plan.
The truth is that any purchase requires some kind of commitment of life resources. Purchases aren’t just financial. They require time to maintain, the ability to use them enough to justify the expense and the resources for any future upgrades or associated costs. Go into any purchases with your eyes wide open to all possibilities – not just what you want to have happen.
If you just decide to pack up your house, call a moving company, and hit the road there will be so many other areas of your financial plan that will be impacted starting off with relocation fees including selling your old place and buying/renting a new one, new tax laws that can impact your retirement income strategy, taxes on social security, and state-specific tax law. You will also need to look at your estate planning as each state has different rules on estate taxes, inheritance tax, probate, etc.
You get the picture. One choice impacts so many different aspects of your plan like a domino effect. All of this isn’t to say you can’t or shouldn’t relocate in retirement. Relocating might be something you are really looking forward to and we can help make that happen with proper planning to ensure you have thought everything through.
Head back to the basics…your savings plan
When you are thinking about how you will spend money in retirement, it all comes back to striking the right balance between your ideal lifestyle and proper financial legwork to help get you there.
A good first step is to narrow down your values to your “Top 5”. Then, you can use the values to guide your goals, and determine how much money you’ll need to pursue your ideal retirement.
While there are many ways to determine how much money you will need to sustain your ideal retirement lifestyle, one of the best ways is to look at how much money you are currently spending per year. First think about your basic living expenses like your house, food, utilities, entertainment, travel, gifts, and taxes. How much do those cost you each year?
Once you have a clear idea of exactly how you are spending your money, you’ll need to think about how your spending habits will transfer into your golden years.
- Have you saved enough to be able to maintain your same lifestyle?
- Are you looking to downsize your expenses and cut back on spending either on housing or extracurricular expenses?
- What does your ideal retirement really look like?
- Will you still have some additional money coming in from a part-time job or encore career?
- What are you going to do in retirement that jazzes you?
- Do your goals line up with your values?
- Have you tested out your retirement plan to see if it works for you?
- Have you tried to live off of your retirement income goal prior to actually retiring?
These are important questions that will help you determine how much money you need to save in order to give you the retirement you are looking for. The next step is to determine if the retirement plan you have created is really the right fit for you.
Maybe you thought you wanted to stay in your house but realize you want less home-maintenance and to be closer to your grandchildren. That is why we recommend testing out your retirement plan to make sure that you are happy with the plan you have created. If you aren’t, then we can work together to make some changes to support your new goals and dreams for retirement.
Don’t worry, we have a backup plan
If there is one thing we are sure about, it is that plans change. When we work together on your retirement plan, our team intentionally puts what we call “buffers” into your retirement plan. In essence, we plan for large unexpected things to come up because your needs may change and we want to make sure we plan for that ahead of time and are ready to help you make that change as seamless as possible.
Even though we approach the retirement plan on a conservative basis that includes “buffers” it is often very difficult for the plan to withstand numerous buffers and a habit for overspending. Our role is to sound the alarm bell when we notice overspending start to creep into the danger zone of your retirement plan.
To put this in perspective, our “What are you afraid of” tool in our financial planning software helps simulate how the investments would perform during the market downturn in 2008, this will also show you the possible impact it might have to your plan. But with consistent overspending, your budget won’t be able to sustain itself and that is often a much bigger problem than people realize.
No one wants to run out of money in retirement, and we certainly never want our clients to experience that level of financial stress which is why it is important for us to educate clients on how severe spontaneous overspending can be to their retirement plans. We often have clients joke that they plan to spend all of their savings before they die, and our reply is always: Just don’t get the date wrong!
TFS is here to serve you
We are passionate about helping you plan for your ideal retirement. Longevity planning is a big piece of that puzzle, making it important for you to keep track of your spending habits in retirement.
A few large purchases here and there won’t drastically impact your retirement in the long run but consistent over-spending can lead to many problems down the line. We love working with clients to help them build a financial and lifestyle plan for their retirement. Give us a call today to find out how we can help you.