While retirement planning can be overwhelming, managing your savings during retirement seems to be even more so. Recent research suggests that about half of working-age households are at risk of not being able to keep up with their pre-retirement lifestyle, even if they work to age 65, according to the Center for Retirement Research at Boston College Opens in a New Window. See note 1 Although there can be many reasons why folks are facing a shortfall, underestimating the full cost of retirement is cited as a contributing factor.
To be fair to the average retiree, more extensive education seems to exist around how to save for retirement than how to spend during retirement. A basic question like "How much can I draw down from my savings every month and still make my nest egg last?" can be difficult to answer and is unique to each one of us.
The good news is that there are steps you can take to get back on track if you overspend in the early retirement years. Here are a few ideas on how to get your spending in order.
1. Review your investments and withdrawal strategy.
Asset allocation, diversification and tax efficiency
These are important for investing retirees who want to maintain spending power in retirement. Many retirees may be over- or underweighted in certain asset classes or hold concentrated positions as they approach retirement. Market risk becomes even more critical as retirees draw down their assets. Make sure you have the right mix in your portfolio that's appropriate for your situation.
Withdrawals from your retirement nest egg
These can be challenging to manage. Although the famous 4% rule, for an initial withdrawal rate, may be appropriate for some, several strategies are available that can help maximize portfolio withdrawals. The problem is that people can be confused about their options and may not make optimal choices regarding withdrawals. There are multiple withdrawal strategies available, ranging from the simple (required minimum distribution method) to the more complicated (dynamic withdrawals). Here, it's important to seek help from a Retirement Income Specialist.
2. Revisit your expenses.
Your budget and discretionary expenses
In retirement, it's especially important to have a budget to know what's coming in and where the money is going. If your shortfall is minor, then just tweaking a few small discretionary expenses like movies or dining out might do the trick. But if you're depleting your nest egg in a serious way, then read on for other suggestions.
Housing and transportation
Housing and transportation comprise 50% of the budget for the average American household across all age ranges, according to figures from the Bureau of Labor Statistics Opens in a New Window. See note 1 Although your house may be your "castle," consider saving more by downsizing or relocating. The same goes for our auto and transportation expenses. Look at the total cost of ownership and consider lower cost alternatives.
Family obligations
More folks are nearing their own retirement while still carrying the financial burden from children or grandchildren as well as obligations for parents and grandparents. Look at ways to reduce this burden, such as requiring children living at home to contribute more to household expenses.
Health care
On average, our total spending during retirement tends to drop with age as reported by the Bureau of Labor Statistics Opens in a New Window. See note 1 But when we compare what we spend on health care at age 60 to health care costs at age 70, we find that health care makes up a larger portion of your budget due to the need for more health care services that may also be more costly.
3. Consider other options.
Part-time work
Working longer is one of the most effective ways to reduce the stress on your retirement nest egg. If possible, work part time during retirement. Because so many baby boomers are retiring, there is a lot of media coverage regarding part-time work for retirees. Do an online search for something like "best jobs for retirees."
Housing decisions
"Right-sizing" the living conditions, relocating, adding a tenant or cohabitating with family or friends are just a few things you can do to reduce housing expenses. It's also important to consider not only the house but the neighborhood or state. Some states don't tax military pensions, which could significantly assist veterans, or they limit property taxes for seniors. What state you live in can make a difference when cash flow is tight.
Other assets decisions
Although it may not be appropriate for everyone, consider utilizing home equity, such as through a Home Equity Conversion Mortgage reverse mortgage, to help bridge the income gap. This might help until Social Security is claimed, or it can pay for unexpected health expenses.
Guaranteed income See note 2
Although some pensioners and military retirees may already have a steady stream of income, many others will have to establish a guaranteed income floor that ensures coverage for your essential expenses. If the essential expenses aren't covered by your current guaranteed income such as Social Security or pensions, then look at filling the gap by creating your own private pension with annuities or other guaranteed solutions.
To help figure out how much you would need to deposit as a lump sum to cover your essential retirement expenses, use an annuity calculator. Recently, a retired member called a USAA Retirement Income Specialist in a panicked state. He and his wife had overspent by nearly $100,000 in the first few years of retirement. They no longer trusted themselves to manage their own funds.
Their advisor recommended they keep a certain portion in liquid savings and roll the rest into a Single Premium Immediate Annuity or SPIA. This plan helped give the couple freedom to spend their remaining nest egg as they saw fit, while giving them the security of a steady paycheck. See note 3
Have more questions about your retirement?
Talk to a USAA Retirement Income Specialist.