Do you have a spending plan based on maintaining your lifestyle? How long can you sustain your current lifestyle? Have you stopped to envision what retirement lifestyle you want to enjoy? Is it visiting grandchildren, taking trips around the world are taking time for some hobbies the corporate rat race didn’t allow for?
No matter what the thoughts are a budget can help you help from having those dreams slip away. Not just any spending plan, but one that encompasses the what-ifs of today and the probabilities of tomorrow. Let’s start with tomorrow. Do you know how much you will need at the beginning of your retirement to enjoy today’s dreams? If you’re like many people you have not stopped to make that calculation. A decreasing number of people have the benefit of an actuary to help them make those calculations.
In fact, people I talked to don’t know that there is someone called an actuary who makes those calculations. Certain professionals such as CERTIFIED FINANCIAL PLANNER™ professionals and Charter Retirement Planning CounselorSM have been trained in helping people determine how much they will need and how to fund that future amount. For many, the more important question becomes: “How much can I spend in the future without running out of money.”
There is new research happening that questions some of the long-held assumptions on how much one can spend (what percentage) from savings without running out of money. Properly managed pensions have provided historically provided that assurance to retirees.
Retirement planning needs advice
A CERTIFIED FINANCIAL PLANNER™ professional will not typically tell you to save 10% of your income. Rather, learning about your specific needs, wants, and wishes, and assumptions will provide a specified dollar amount like $562 per paycheck. Likely they would have discussed your risk tolerance, your risk need, and various savings amount options. I have not met any people who are saving money based upon what retirement lifestyle they want to enjoy.
As we age our health care costs will likely rise. Medicare does not cover everything. There are out-of-pocket expenses. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement. In my experience, no one has thought about this category of rising expenses as part of their retirement spending plan.
If you do think about this and can save into a health savings account (HSA), then you may be able to fund that amount with an amount far smaller than that out-of-pocket. You can invest an IRA like an IRA. An HSA reduces your current tax bill and is tax-free when withdrawn if used for healthcare expenses. Neither the IRA nor Roth IRA has all 3 of these benefits. Unlike the IRA or Roth IRA, there is no phaseout for high-income earners. Is this in your budget?
What ‘what-if’s’ should be in your spending plan?
None of us like to think of unpleasant situations like death, disability, and unemployment. Do you have reserves or you might say rainy day fund if you become unemployed? While some people have anchored on say at 3 to 6 months emergency fund, your cushion may need to be larger. Is it realistic to believe that you would be back in a job of similar income in 3 to 6 months?
I have known a couple of people who have found that not to be the case. While some believe that there will be relief from unemployment insurance, many find that it does not replace the income that they were making. Moreover, your unemployment benefits may be exhausted depending upon the length of time it takes for you to get reemployed.
While many are aware of life insurance, most don’t believe that death before their retirement years will knock on their door. Yet, there are families who suffer from the loss of the income of the primary breadwinner on a regular basis. Even the loss of the non-primary can have devastating effects when the survivor has to pay for services the deceased provided.
Have you budgeted for an insurance policy that will replace your expected income until retirement? Does that amount include the amount you should be saving for retirement? Many people find themselves that 6 o’clock news story of someone who was injured in an accident. I see more and more of my friends experience some kind of physical disability. While they may have great insurance to pay for the majority of the medical bills, they may have deductibles, co-insurance, and co-pays. Moreover, while the majority of the medical bills may get paid what about the other household costs of living that their income paid for?
A disability income policy is a key factor in taking the risk of a disability derailing your life goals.
Your spending action plan
The best time to create a spending plan is now. The beginning of a new year is a great time or really any time. No matter where you are at, you need a plan to get you to the next phase. Once developed, will you need an accountability partner or personal financial trainer to keep you on track?
Contact us today to allow us to help you design and build the spending plan to propel you forward.