Most of my buddies are in retirement, or are getting close. We spend a lot of time chatting about how to enjoy our retirement, and how we might have planned differently. I thought it would be worthwhile to gather some of that info here. Read on to learn about preparing for retirement.
What Do I Spend?
Every article I read about retirement talks about how much you need. What’s the magic number?
The answer is, it varies, a lot.
If I have 10 more years on my home mortgage, I’m making car and boat payments, and I’m considering buying a lake house to enjoy in retirement, my financial requirements are quite different than someone who has paid off their mortgage and cars, and is happy in their current home.
While ideally, we would put together a budget, at a minimum, we need to assess what we spend. I am a big fan of account aggregators which pull all of our financial accounts, loans, credit cards and other info together in one spot. We trade off a bit of privacy (or a lot…do some research before choosing an aggregator) but we can see all of our transactions in one spot.
Or we can manually aggregate. Block off some time, get your checkbook, bank statements, credit card statements and anything else you use to pay bills and start a list.
Start with monthly expenses – utility bills, mortgage, car payments…this will catch most of our expenses, but try to expand to a full year. If you’re like me, you have some bills like insurance that are big ticket items that I only pay once per year. We need to account for these as well.
Now we have an important number. As we go through our first year, we’ll find things we missed and add them. Ideally we’ll start to see a pretty consistent number each year.
What Do We Expect To Spend?
This is a complicated question. There are some big unknowns. Will I be healthy or will I need some assistance? Let’s leave these aside for now.
Spending
First, let’s take a look at the number we arrived at above. While many articles tell us that our expenses will be reduced in retirement, I have not found that to be the case. I drive about the same. While I no longer commute to work every day, I now visit my mom regularly to help as she ages. I still eat. Sometimes out, sometimes at home, but this hasn’t changed. For me, what I spent before is about what I spend now.
Travel
Coffee Rich and I discussed this on Saturday. We both want to travel and have lists of places we’d like to see. Rich is 65 and I’m 61. We talked about how long we’ll be healthy and feel like traveling. While we’re feeling good today and a 10 day walking tour of Italy sounds great, this probably won’t be as fun for us in 10 years.
We decided that we probably have between now and our early 70s to get most of our traveling done. After that we may have an occasional trip to a warm weather destination, but our travel spending should drop.
Plans
If we’re doing retirement planning in our 50s or 60s, it’s hard to imagine everything we’ll want or 30 years from now. But that’s the beauty of a plan. It can change. We create a plan, put our assumptions down on paper. Some will be accurate, some not. We’ll adjust as we go. This takes a lot of pressure off the planning process.
But let’s make sure we hit the big stuff. Travel can be a big cost and we already talked about that. What else is on our bucket list. Do we want a summer house? Are we downsizing or upsizing our home, or staying put? Have we always wanted a boat?
Let’s make sure we account for the big things.
Income
Even though we’re retired, we still probably have some income. Which also means income tax so don’t forget to read my post on estimated tax payments here.
Just like with spending, let’s create an inventory of our income.
Social Security
We’ve paid into social security via payroll taxes for our entire working lives. We expect that something will be there for us when we retire. Create an account on ssa.gov to find out exactly what we’ll receive.
This is a pretty cool site. It will show us what to expect in monthly Social Security payments at early, full and delayed – for me at age 62, 67, and 70. The longer we delay payments, the larger the monthly check. Read more about when I should take social security here.
I can also see my earnings history. In 1979, I earned $1,257. That’s cool. They have info from my high school job at Zayre department store. Take a look. You can challenge errors. Your benefit will be based on your salary and the social security tax you paid on that salary, so make sure this is correct.
Pension
Some of us are lucky enough to have a pension that will pay us a monthly check from retirement until we pass on. My most recent employer had no pension, but my prior employer did. When I turn 65, I get a monthly check for $512 for life.
Retirement Withdrawals
We’ve spent our working careers (hopefully) contributing to our defined contribution plans. There is a lot written about saving for retirement, but not a lot of guidance on starting to withdraw.
Some go by the 4% rule. This rule projects that in year 1 of retirement, we can take 4% of our account balance out. In subsequent years we can increase our withdrawal amount by the rate of inflation to keep pace with prices. This should last us 30 years. This is not a bad place to start for planning purposes.
In general, after age 59 1/2, we can take retirement withdrawals without penalty, but we still have to pay taxes on traditional IRA and 401k withdrawals. We will not pay tax on Roth contributions.
RMDs
Different than a WMD, an RMD is a required minimum distribution from a traditional retirement account. The US government is nice enough to allow us to defer taxes on our retirement savings, but they are itching to get their tax money back. Once we turn 72, we will be required to take a certain amount of our retirement plan balance out each year and pay taxes on the distribution amount. Don’t forget to do this. There are big penalties involved.
Working
Most of my buddies and I are perfectly happy playing golf, getting together for coffee or lunch and find that we keep ourselves busy enough. Others crave additional interaction, or may want to supplement their other income sources with a part-time job. If this is right for you, be sure to include it in your plan.
Brokerage or Savings Withdrawals
Some of is may have money saved outside of our retirement accounts. While savings withdrawals should be tax free because we’ve already paid taxes on the principal, and we pay taxes yearly on interest, brokerage account withdrawals may have tax consequences.
I have been selling some shares of companies in my brokerage account to raise cash to fund some of our spending. While the principal (cost basis) has already been taxed, the gains (capital gains) have not. Read more here.
Wrap-Up
I tricked you.
We focused on the financials – how much do we spend, how will that spending change based on retirement plans, and how much income will we have. We all got out our pencils and paper and created lists to figure this out. So we should have a better idea about what our financial plan looks like.
But, we also thought about what we’re going to do in retirement. Where will we live, will we buy a house, a boat, how much will we travel, will we continue to work? Retirement planning is not just about the finances. Yeah, we need to have money to pay for stuff, but we have a lot of years to go (hopefully), what do we want to do?
Knowing what we’d like to do is important. Once we’ve established that, we can work with the finances to meet our goals. Too often, we’re encouraged to start with finances first, or think about finances alone.
A final note, there are lots of planning tools out there that help us enter our financial info and project our spending rate. These can help give us more confidence in our plan, and tweak some of the inputs to model different scenarios.