5 Steps for Understanding Your Retirement Spending Needs

By: Stacey Nickens

Many of my clients list their primary savings goal as saving for retirement. However, this goal can feel general and amorphous. It can be helpful to better understand your specific spending needs in retirement and save for those needs. Moreover, planning for retirement goes beyond planning for your financial needs. Transitioning from full or part-time work into infinite free time can be immensely challenging. As you plan for your financial needs in retirement, it’s important to budget your time and money for your emotional and physical well-being. To get started, review the steps below in order to better understand what you could currently be doing to save for retirement.

Step 1: Think through your financial, emotional, and physical needs in retirement. It may feel silly. However, it can be really helpful to create a possible retirement schedule for yourself. You will likely have more time than you expect. How will you spend that time? You could think about hobbies you may want to try or volunteer work that you may want to do. You could research social activities that could help with some of the loneliness that often comes with retirement, daily exercise activities that could benefit your body and mind, and other ways to help you thrive in retirement. Mapping out how you may spend your time in retirement will help you with both the emotional and financial transition into retirement. New hobbies, exercises, or social activities can cost money and change how you budget. Mapping out how you want to spend your time can give you a better idea of what your savings goals should be.

Step 2: Select your top retirement savings goals. Of course, you will need money for your day-to-day expenses in retirement. However, you should also consider non-regular expenses that you may need to build into your budget. Some of these savings goals could include…

1. Saving for one or more planned vacations each year.
2. Saving for home renovations. Keep in mind, your home may currently meet your needs. However, as you age, you may need to equip your home in different ways. Consider how you may need to outfit your shower, manage your stairs, or in general make your home more accessible. Thinking about what your parents or grandparents needed as they aged could help you better predict your own needs.
3. Saving for auto maintenance or for a new car purchase. 
4. Saving for your annual tax bill.
5. Saving for your insurance premiums.
6. Saving for healthcare expenses. At age 65, the average individual spends 10% of their income on healthcare expenses. However, by the age of 85, the average individual spends 20% of their income on healthcare expenses. These expenses include both insurance premiums and out-of-pocket expenses. It is important to accordingly budget for rising healthcare costs as you age.
7. Saving for assisted living and/or hospice care. Think through how you will want to live in the event that you can no longer live without assistance. Moreover, think through how you would like your end-of-life care to look.
8. Saving for your emotional and physical well-being. Think through your answers in Step 1. Will you need to pay for new gym memberships? Will you need to account for the cost of different hobby materials? These expenses could be small but leaving them out of your budget could lead to you underestimating your retirement spending needs.

Select 3-5 goals and budget how much you would need to set aside in order to reach those goals. Perhaps you will need to set aside a lump sum for home renovations or plan for additional monthly expenses, as could be the case with a new hobby.

Step 3: Be honest with yourself about your likely retirement age. Studies show that people who plan to retire before the age of 61 often end up retiring later. For example, if you had planned to retire at age 57, you may actually retire closer to age 60. Studies conversely show that people who plan to retire after the age of 61 tend to retire earlier. Ask yourself when you thought you’d retire and perhaps adjust the number to more accurately reflect what may happen.

Step 4: Adjust your current annual expenses to account for your changing needs in retirement. Now that you know when you may retire as well as your possible additional spending needs in retirement, you can come up with a rough estimate for your annual retirement spending needs. To start, you could simply review your credit card and bank statements from the past few years to see what you are currently spending on an annual basis. You don’t need to dive deeply into that data, just try to come up with a an average number. Many people think that, once they retire, their spending will decline. However, I find that is rarely the case. Even if you spend less money on gas for commuting, you often will end up finding a new way to spend those funds.

Once you have rough understanding of your current annual expenses, you can start adding in some of the expenses you calculated in Step 2. For example, if you spend $100,000 each year now, and know that you may want to do a $5,000 vacation each year in retirement, you could say your annual budget should be something along the lines of $105,000. Or, if you know you want to have a certain lump sum set aside for assisted living, you can build in an annual savings goal into that retirement number.

Step 5: Think through how you will cover those annual expenses. First, account for consistent income streams, such as your Social Security or a pension. Then see how much of your remaining retirement spending needs will need to come from your retirement savings accounts. You can then decide how much you need to be adding to your retirement savings accounts now. Additionally, you can set a growth target for your investments. Finally, you can think through how much annual dividend income you would need to cover your expenses. Your growth and dividend needs can help you direct how you invest your money or how you would like me to invest your money.

Each year, you will likely need to adjust and revisit your retirement budget. However, being more honest with yourself about your retirement spending needs will help you make better financial decisions. As always, I am happy to help you develop your retirement plan and savings model. This can be a challenging and complex process, and I am experienced in developing flexible but honest models. I encourage you to reach out to start your retirement plan today or review a plan that we have already started.