Decide what you need (and what you want)
In order to effectively plan your retirement, you first need to settle on what it is you hope to get out of it. Do you yearn for a quiet life at home with the occasional visit from the grandkids? Or have you been bitten by the travel bug, and do you plan to sail around the Greek islands for months at a time? Whatever the scenario, you’ll want to map out your needs and wants and plan your finances accordingly.
Write down everything that has a cost and see if it qualifies as a need or a want. Note that the need column may grow over time as such expenses as healthcare increase. Realism and flexibility are essential for successful planning—own up to what you need to be “comfortable” and then see what resources it will take to make that happen.
Just remember to start slow. Most experts recommend withdrawing only 4-5 percent from savings accounts in your first year, adjusting for inflation in future years.
Plan your investments
As your saving-to-spending ratio begins to shift, consider separating your investments into buckets that will service different retirement priorities. This strategy is recommended by David Zavarelli, a certified financial planner and independent financial advisor in Danbury, Connecticut:
Short term: This covers the immediate future, two years or fewer, and includes your most liquid of assets, such as cash or short-term bonds.
Middle term: A little further out, 3-6 years, this bucket tends to be an even split between stocks and bonds. It can be a particularly useful resource to replenish your short-term bucket.
Long term: This bucket is meant for growth and thus may take on more risk.
While a solid investment plan is a necessary component of your post-retirement strategy, it will ultimately be of little use without a budget.
Set your budget
No matter how large or small your nest egg may be, your finances will evolve in retirement. Income, expenses and fiscal priorities will all change as you enter this new stage of life. A budget is an integral tool to manage your resources so that they match your longevity.
Your first step should be to tally how much you spend each month and map what goes in and out. Take a hard look at your monthly bills—cellular, internet, cable, landscaping—and decide which you truly need and which are simply convenient.
Next, identify the expenses that are essential and fund them with income streams that are more stable, such as pensions, Social Security and annuities. These expenses often include:
Housing: Whether or not you still make home payments, rest assured that maintenance, utilities and repairs will continue. Add to that the potential for larger doorways, ramps and railings for accessibility. Conventional wisdom suggests that you set aside 1 percent of the value of your home for annual upkeep.
Healthcare: This will likely be your biggest retirement line item, with the average couple retiring in 2018 estimated to need nearly $280,000 to cover health-related expenses.
Transportation: Even though the daily commute is a thing of the past, costs for gas, auto maintenance (or replacement) and public transportation are still a reality.
Finally, lay out your anticipated discretionary spending on the fun parts of retirement, which are typically funded through IRAs and similar tax-deferred savings accounts. The fun begins with:
Travel: This can range from long drives in the country to grandkid visits to epic voyages across Europe, each with its own price tag. Maintain a monthly allotment for travel in your budget, giving yourself some wiggle room if you want to splurge.
Entertainment: The theater, movies, dining out and the like are wonderful ways to enjoy retirement. But those costs can add up, particularly if no one is keeping track. A budget allows you to enjoy that star-studded Shakespeare revival or new Michelin-starred restaurant with a clear conscience.
Gifts: From birthdays to bar mitzvahs to baby showers, that generosity can take a bite out of your savings if you haven’t planned for it.
No matter your vision for this part of your life—travel, grandkids, entrepreneurship, time in the hammock—it requires active planning whether you are waiting for or living in retirement. Get started today with our retirement calculator.