Formulating A Retirement Plan: How You Save and How You Spend

By Matt Golba

Contrary to conventional thought, retirement planning is not something that ends once one actually leaves the workforce and starts chipping into the nest egg. Many pre-retirees are under the impression that retirement planning is what you do on your way to retirement – and then, once you hit the age where it makes financial sense for you to leave the workforce, your days of retirement planning are more or less over.

There is a sense in which this is almost true. Certainly, investing in your Roth IRA, Traditional IRA, or 401(k) is something you’ll do on this side of retirement. Once you start making withdrawals, hopefully not until your retirement actually begins, you’ll stop paying into it and instead rely on compound interest to keep the account growing. However, there are other aspects of retirement planning, and of general financial prudence, that must be attended to even during the retirement years. (In other words, it’s not necessarily one big vacation!)

It might be helpful to think about retirement planning in two distinct stages. On the one hand, there is retirement saving, wherein you’re putting money away so that you can one day enjoy a happy, financially secure retirement. Once that retirement begins, you transition into retirement spending – that is, making prudent use of the money you’ve saved, ensuring that you don’t live beyond your means and that you don’t use up your savings prematurely.

Shifting Your Mindset

It is important for retirees to acknowledge this transition, and to acknowledge the shift in their minds. Once you retire, you are out of savings mode and into spending mode. At this point, the ways in which you can prudently protect your retirement assets have more to do with reasonable spending than they do anything else.

The question is, how can retirees ensure they are spending wisely – not eating through their retirement accounts too quickly? There are several important steps, and one of them is ensuring you have adequate retirement savings to begin with. This means constructing a retirement budget – or a spending plan – before you retire, and working with your financial planner to make certain your investments are going to make this spending plan sustainable.

The Elements of a Plan

There are many aspects of a retirement spending plan to think about, and the wisest course of action is to set goals and expectations long before you retire, and then stick with them as best you can during the retirement years.

Some specific things to address when developing your retirement spending plan include:

– Health care costs: This is something that nobody likes to think about, largely because predicting health care costs can be so difficult. However, you should plan on spending for some out-of-pocket health care expenses during your retirement. Things like Medicare can help, and a financial advisor will be able to tell you what you can expect from this, but in the end you have to plan for the worst, healthwise, and hope for the best.

– Long-term care: On a related note, it is impossible to know whether you or your spouse may ever need a long-term care facility. It is hardly outside the realm of reason, though, and as such it is smart to account for this in your retirement planning.

– Taxes: Your retirement investments are going to land you with some taxes to pay, without question. How much? That depends on your investment types. Your financial advisor can work with you to ensure you’re planning for all pertinent taxes and fees.

– Lifestyle choices: Finally, there is always the question of what you are going to do during your retirement. Many pre-retirees assume they will slow down and downsize a bit during their retirement, but statistics tell us the majority of retirees actually spend more on daily living than they did when they were in the workforce. Of course this is not necessarily a bad thing, and if you want to spend your retirement traveling the world then you have every right to — but your retirement spending plan should allow for this.

– Your family: How much of your nest egg would you like to leave behind, as part of your estate? What kind of financial legacy would you like to leave for your family? This is something your retirement spending habits should reflect. The last thing you want is to end up spending the money you’d once hoped to leave to your grandchildren.

More Than Money

Retirement planning isn’t just about finances. While getting your monetary matters in line is important, you should also note that retirement can bring with it its own set of emotional hurdles. Overcoming these hurdles may sometimes mean that you just need to get out of your house, to take up golf, to join a social group, to travel, or something similar. There’s nothing wrong with this, but again, it can cost money; best to plan ahead for it, just in case.

More than anything else, discipline is important – both in how you save and in how you spend. Together, these two stages can comprise a savvy retirement strategy.

Matt Golba is founder and financial advisor at Golba Financial Group in Traverse City. Golbafinancial.com, 231.668.6999.

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