On the surface, it sounds simple enough: to make retirement funds last, monthly income should equal (or ideally, exceed) monthly expenses. Yet, getting a handle on what you’ll be spending in retirement—especially over the course of a lengthy retirement—is a tall order for baby boomers.
According to a recent study1, 77 percent of Americans over the age of 40 don’t know how much of their retirement savings they can safely spend each year without running the risk of outliving their assets. More than half of Americans over the age of 40 (58 percent) overestimated the safe withdrawal rate.
Part of the trouble lies in understanding retirement expenses, which can be both higher and lower than expected. For example, a recent analysis2 of statistics from the Bureau of Labor Statistics found that the average American retiree spends just about $43,600 a year. That total can rise considerably, though, especially if health issues arise.
How can you get a better idea of what you’ll need to spend and withdraw each month during your non-working years? It helps to break your potential spending into three categories:
- Normal/recurring: These are expenses like housing, utilities, and food. Necessities that tend to cost the same amount from month to month.
- Discretionary: These are mostly entertainment expenses—dinners out, vacations, luxury items. These expenses can be reduced if needed.
- Unexpected: This includes home and auto repairs and out-of-pocket health care costs. These are difficult to reduce or plan for, but they can sometimes be insured.
Whether you’re retired or close to retirement, track all your spending on a daily basis, bucketing each expense into one of the above categories. Over three to six months, you’ll get a better idea of what you’re spending each month. You’ll also be able to spot areas where you can cut back—now or later.
Then, take a look at how you plan to pay for those expenses. Retirement income tends to come from one of the following six sources:
- Investment accounts: Most people hold some form of stock/bond/mutual fund account, whether a 401(k), an IRA, or a taxable fund. For many, withdrawals from these funds will make up the bulk of retirement income. Use caution and remain conservative when making income plans based on the expected growth of these accounts in your retirement years, as market changes can be unpredictable.
- Insurance products: Immediate annuities are the most popular type of insurance product used for retirement income. By giving a lump sum of money to the insurance company, you are guaranteed a monthly check, usually for life. These products can help make your income stream more predictable.
- Tangible assets: If you’re 62 years or older and have at least 50 percent equity in your home, you could qualify for a reverse mortgage, allowing you to tap the value of your home for income. Rental properties are other tangible assets that can provide income—as well as potential tax breaks.
- Social Security: By visiting www.ssa.gov, you can access your records, including projected future benefits. Knowing how much you can expect from Social Security each month can help you determine how much income you’ll need from other sources to meet your monthly expenses.
- Side income: Many boomers are proving reluctant to fully quit the workforce, staying on at their job part-time or launching encore careers. According to data from the Bureau of Labor Statistics3, almost 20 percent of Americans 65 and older are now working—the highest level of older people with a job since the early 1960s, before Medicare was enacted. Money from these endeavors can help meet monthly expenses and slow or delay withdrawals from savings.
- Pensions: Many baby boomers no longer receive pensions, but for those who do, the regular checks can provide a steady source of income each month.
By better understanding where your money comes from and where it’s going each month, you can create a better strategy for drawing down retirement funds in a balanced manner.
1 “77% of Americans Don't Understand How to Safely Withdraw from Their Nest Eggs in Retirement." 77% of Americans Don't Understand How to Safely Withdraw from Their Nest Eggs in Retirement. New York Life Insurance Company, 12 Apr. 2016. Web.
2 Stoffel, Brian. "Here's What the Average Retired American's Budget Looks Like." The Motley Fool. The Motley Fool, 25 Jan. 2016. Web.
3 Steverman, Ben. "'I'll Never Retire': Americans Break Record for Working Past 65." Bloomberg.com. Bloomberg, 13 May 2016. Web.