By Greg Sullivan

Excessive spending is one of the reasons people “fail” at retirement—and it lies at the root of many other potential pitfalls, from buying a second home to financing the life goals for your adult children.

But what is excessive? For most people, excessive is defined in terms of others’ spending, and means “more than I would pay” for any given item.

To get a sense of your own patterns, take a clear-eyed look at your spending habits. Does your outflow of cash often turn into a torrent? Perhaps you start out wanting to update your patio, and soon you’re pouring thousands (or tens of thousands) into a full-on renovation of your outdoor entertaining space, complete with a backyard fireplace, high-end outdoor kitchen, hot tub, and other luxury features.

Or maybe you routinely go out shopping and return with Apple Watches for your tween grandchildren, have expensive dinners out five nights a week, and take the extended clan on exotic vacations every year. A pattern of free spending can raise caution flags, even if no single expenditure is outsized.

But, of course, whether any particular outlay is a wise one depends on how much money you have, and on whether you are have created—and are sticking to—a spending plan that’s in line with your income and assets.

Spending in Retirement

Overspending can be an issue for people at any stage of life, but it’s a bigger problem when you are no longer working. Once you’re retired, you are unlikely to be adding to your retirement bucket. You have a finite amount of assets to draw from over an uncertain period of time.

While conventional wisdom dictates that you need 80% of your preretirement income to maintain your lifestyle in your post-work years, recent research has shown that spending patterns are actually quite variable—while some households do indeed reduce their spending considerably, nearly half spent more in the first two years of retirement than they had while working.¹ And 28% of the retirees surveyed spent more than 120% of what they’d spent in the years preceding retirement, with the majority continuing that pattern of increased spending into their sixth year of retirement.²

So, while 80% may indeed represent an average, the spending picture is uneven, with some households cutting spending by a sizable amount and others increasing their outlays rather dramatically.

What’s Your Projected Income in Retirement?

When thinking about your spending in retirement, what matters most are your sources of income. These typically include your Social Security income; potentially, income from a pension plan; and the income generated from your investment portfolio (both retirement and personal investment assets).

Your assets should be allocated so that they provide a 4 to 5% annual distribution that, when combined with your income from Social Security and/or a pension plan, is a comfortable amount for you to live on. This is the key to a financially successful retirement.

Being too conservative and allocating all your assets to short-term bonds or low-risk investments means that you may not be able to withdraw what you need in retirement. Investing too aggressively can result in losses that may completely disrupt your assets, which means you may not be able to withdraw at a rate that can support you in retirement. Investing correctly is critical to bringing you peace of mind and achieving your long-term retirement goals.

Consider Your Goals

Appropriate spending comes down to your own priorities and to what is reasonable given your personal finances, values, and goals. The answer is going to be different for each person. (I know, I know, you were hoping for a simple formula!)

Take some time to reflect what you’d like this next phase of your life to look like. How will you spend your time when you have either stopped working or have slowed markedly? What kind of lifestyle do you expect to have? What will your days look like? Tally all the things you’d like to do in a typical year, and also the things you’d like to do for family. Think ahead, too, to how your life might change as you age, and make provisions for unforeseen events.

Review your projected expenses with your financial advisor. Get a second opinion and some feedback. Financial advisors deal with income versus spending issues all the time, so we have many experiences to draw from to help you find the right path for you and your family.

Have a Plan and Stick to It

A strong financial plan takes into account your monthly expenses such as housing, food, entertainment, and health insurance; savings for purchases such as a new car or for major home repairs; extra expenses you want to budget for in retirement such as travel or home health care; and taxes you will need to pay.

You should also think about other things you may wish to pay for during your retirement, such as contributions to an adult child’s wedding, a child’s new business venture, or a grandchild’s education bills. Once you have a firm sense of what your projected outlays are, you will be able to think about the other things you want to do and how they will impact your overall plan.

For every financial decision, you have a choice: Save or spend.

For each major spending decision, ask:

• Does this expenditure reflect what is important to me?
• What is the impact of the decision on those around me?
• Will my personal finances support this decision?
• Does the decision support my family’s values?
• Am I moving closer to my personal goals with this decision?

Knowing how much money you have coming in, where your money goes, and what your projections for retirement are will help you make financial decisions that put you on firm ground as you head into your post-work life.

Cheers,
Greg

To learn more about Greg or want discuss retirement visit, SBSB Financial Advisors.

1.Ruth Davis Konigsberg, “Beware the Retirement Splurge,” Time magazine, November 23, 2015. Accessed June 18, 2017. http://time.com/money/4123785/retirement-spending/.↩

2. Konigsberg, “Beware the Retirement Splurge.”↩