Help Me Retire Podcast - Episode 13
- Mike Brown
- Jan 30
- 9 min read
Your retirement spending plan
Show notes:
This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…
Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…
He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…
And now… here’s Mike…
Second in series of podcasts... talking about seven steps to a successful retirement...
Last episode... helped you create your own vision of what retirement should look like...
In this episode... going to tackle what is probably most important question people face when planning their retirement...
What’s it going to cost... to live the retirement you’re envisioning?
Big question... difficult question... vitally important question...
Today’s episode of Help Me Retire... going to help you figure out the answer...
So... I mentioned this is Part 2 in the series... the second step in planning your retirement...
Last episode... helped you create a vision of what retirement will look like... how you want it to look...
Today... going to talk about what that vision will cost...
Next episode... talk about where to come up with the money it’ll take to support the vision you’ve created...
And how to maximize the income you’ll be receiving once you retire...
That’s Step 3 of the process...
Step 4 deals with protecting yourself... protecting not just your wealth...
But also your health... and your privacy...
Step 5 is to build an investment portfolio that will last the rest of your long life... and create income for you to live on...
Income that keeps increasing faster than inflation... so you never have to compromise your standard of living...
Then in Step 6 we’ll talk about taxes... how to make your investment portfolio tax-efficient... and keep your money working for you...
Finally... Step 7... we’ll start designing your legacy...
Taking care of the people... the institutions... the causes you care most deeply about...
Passing along not only your wealth... but the wisdom you’ve accumulated... throughout your life...
Making sure everything gets done the way you want it... after you’re gone...
Okay... so how do you come up with your... spending number?
How do you know what retirement is going to cost?
How can you decide... how much you can spend each year... to live the life you’ve dreamed of...
First off... my advice would be to avoid simple rules of thumb... like the one that says you should plan on spending 70- to 80-percent of your working income in retirement...
Retirement is way too important to base on a rule of thumb...
There are better ways...
As someone who helps people plan their successful retirements... we can come at this question in one of two ways...
You can say... here’s how much money I need each year... I’ve worked it out...
And as a retirement planner... I should be able to tell you if that’s a reasonable goal... based on how much money you’ve saved... how it’s invested... how much income you’ll be getting from Social Security, and so on...
And if it’s not a reasonable goal based on your situation... I can suggest some changes that might make it work...
Or you might come to me and say... I have no idea how much I’ll need to live on...
Tell me how much I can afford to spend each year... and I’ll adjust my lifestyle around that number...
Either way... our goal is to come up with a spending number... a dollar amount we can use to base our plan around...
So if I asked you right now... how much do you want to be able to spend every year once you retire... how would you come up with an answer?
Hmm.
If a number didn’t just pop into your head... don’t worry...you’re probably like most folks... you hadn’t really thought about that too much...
I mean... there’s a good chance you’ve never been asked that question before... so it’s okay not to have an answer...
So here’s what you do... start by figuring out what you’re living on right now... assuming you’re still working...
What’s your take-home pay add up to... on a monthly basis?
That’s what you’re living on now...
And then... let’s adjust that number...
If you’re stashing money away... even after tax withholding... 401-k contributions... and other deductions...
Then you’re actually living on less than your current take-home pay right now...
So to maintain the same standard of living in retirement... you might lower your spending goal a little bit... below what you’re bringing home right now...
Don’t tighten the belt too much, though... we want lots of wiggle-room in this number... so round it up...
On the other hand... if you’re barely scraping by right now... if you’re actually using credit cards... or borrowing money to make ends meet every month...
Then you’ll need more than the amount of your take-home pay to maintain your lifestyle in retirement... you’ve got to adjust that number higher...
Let me also point out... that if you’re really spending more each month than you’re bringing home... there’s a good chance you shouldn’t even be thinking about retiring yet...
If you’re not living within your means... retirement is going to be rough going...
So that’s the short-cut approach to coming up with a spending goal... simply use your current take-home pay... and adjust that number up or down based on what you’re actually spending...
Let’s call that the top-down approach...
Take what you’re spending now... and use that as a your spending goal in retirement...
Now... if you’re a numbers person... if you really want to come up with a specific number... an accurate estimate of what retirement should cost... you’ve got some work to do...
And we’ll talk about that next...
If you really want to come up with a specific estimate of what you’ll be spending every month... you’ll want to put together a spending plan... a budget...
We can help you with that... we can send you a budget worksheet... and of course there’s plenty of help available online...
Start by listing out your fixed expenses... the bills you pay every month... the things you don’t have a lot of control over...
Your rent or mortgage payment, for example...
Utilities... electric... gas... internet... your cell phone...
Car payments...
Insurance premiums...
Then... in a separate column... make a list of all your variable expenses... things you’ve got more control over...
How much you spend on food, for example... groceries... restaurants...
Other variable expenses... like gasoline...
Household maintenance...
Medical and health care expenses...
What you spend on recreation... travel...
Gifts... and so on...
Next budget category... recurring but non-monthly expenses...
If you pay property taxes once a year, for example...
List that number... and you’ll need to divide it by 12... to put into your monthly spending goal...
Maybe you pay your car insurance twice a year... write that expense down... and divide it by 6 to come up with a monthly number...
Other recurring expenses that you might not have every month... major home repairs... big trips you take with your family every summer...
Or it could be some really big purchase...
If it’s money you plan to spend... but it’s not a regular, recurring... monthly expense...
Got to find a way to work that into your monthly spending goal...
So then... last type of expense... are those things you’re spending money on now... that will go away at some point after you retire...
Maybe it’s your mortgage... or a car payment...
Maybe you’re paying for college for your children or grandchildren... and with any luck they’ll be graduating in a few years...
Those are expenses you have now... and may have for some years to come...
But when those things are paid off... your monthly expenses will drop accordingly...
You’ve got to account for all these different types of expenses in retirement...
Some of them are fixed... some of them change... you have some control...
Some of your expenses occur just once or twice a year...
Some of them... might be a one-time expense that’s coming up three or four years from now...
And some expenses... will end at some point after you retire...
Different types of expenses... different amounts... different time frames...
When we put together a spending plan for retirement... we need to account for them all month to month... and year to year...
In the end... we need to put together some sort of financial plan that accounts for them all... plans for them all...
Instead of saying... the roof’s leaking... but I don’t have the money to pay for that until next year’s budget...
No... you want to be setting aside money for home repairs... so that you can pay for those repairs as they come up...
Just an example...
And while we’re talking about time frames... we’ve got to adjust your plan for two... maybe three different time periods if you have a spouse or partner...
If one spouse retires... and the other keeps working, for example... you’re just replacing one income...
Then, when both spouses are retired... naturally, you’re replacing the second income as well... so your spending goal will increase...
And then... when one spouse dies... we’ll need to make a different spending assumption...
Surviving spouse probably won’t be spending 100-percent of what both spouses were spending together...
But it’s probably a lot more than half...
We assume about 80-percent or so... and we plan for that even though we don’t know when it might happen...
It’s all in the plan...
Okay... a few more things to think about when it comes to putting together a spending plan for your retirement...
First... all of those monthly and yearly assumptions we just made about what things are going to cost when you retire... and how much money you’ll want or need to spend...
You’ve got to assume those costs are going to gradually increase over time... due to inflation...
You might not be buying cars or houses as often once you retire... but prices don’t stop going up just because you’ve stopped working...
What’s a good inflation assumption?
Long-term... inflation has averaged around three percent...
You might not need to assume quite that much... but I think two-percent is too low...
Maybe two-and-a-quarter... two-and-a-half percent inflation is a good assumption for your plan... and of course the nice thing about plans and assumptions... is that we can change them over time if conditions change...
But you’ve got to factor inflation into your plan... and here’s a big point...
You have to make sure you’re investing your nest egg... not just for income... but for income that increases over time... faster than your cost of living...
That’s a really big deal... and we’re going to cover that in Step 5 of this podcast series...
But for now... just be sure that whatever number you use for your spending goal... that you increase that amount for inflation... every year from now on...
Final item when it comes to spending... after you’ve done all this careful planning on what you’ll need month to month... and year to year...
What about those unanticipated expenses that seem to pop up all the time? How do you cover things you can’t predict... without blowing up your investment plan?
Here’s how you do it... two ways...
First... you make sure you have an emergency reserve of cash... money sitting on the sidelines above and beyond your normal monthly spending...
You hope you’ll never need to tap into that reserve... but it’s there if you do... and trust me... that should give you some much needed reassurance once you retire...
Second thing I would do... and make sure you do this while you’re still working an earning a paycheck...
If you own your home... set up a home equity line of credit... again... a way to quickly tap some cash if you need it for an emergency...
You don’t want to use your line of credit unless you absolutely need to... but just like your cash reserve... it should make you feel a lot more confident knowing you won’t have to sell investments to cover unexpected expenses...
Okay... that covers Step 2 of our seven-step plan for a successful retirement...
Step 1... in our last podcast episode... we talked about creating a vision of what your retirement should look like... we call that retiring by design... not by default...
And in today’s episode... Step 2... figuring out how much you plan to spend to bring that vision to life...
Next time... Step 3... finding income... the cash flow you’ll need from Social Security... pensions... and your own investment portfolio... to pay for all those wonderful things you plan to do in the years ahead...
I look forward to helping you on this journey... and if you ever want to sit down and discuss your situation specifically... feel free to get in touch...
Until next time... take care... and thanks for joining me today... on the Help Me Retire Podcast...
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Past performance is not indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
