Retirement marks a new exciting chapter of life. One that should be filled with the things that you love and value; whether that be sampling the cuisine of a foreign country or playing board games in the garden with family.
When it comes to retirement planning, we’ve all heard how important it is to budget and save. But have you ever considered how seemingly extraneous decisions, such as buying that new Nordstrom shirt, could be affecting your desired post-work lifestyle?
How Comfortable is a “Comfortable” Retirement?
When you work a 9-to-5, your free time is limited to weekends, or before and after work. Yet, when you become a retiree, you’ll have more free time than you’ve possibly ever had in your adult life. What was once important in work life may no longer be as important in post-work life; dressing to impress in the courtroom isn’t as important when you spend the majority of your days relaxing in the garden.
Sure, clothes might be a basic need, but you know it’s time to reevaluate your spending habits when you own nine jackets in different “shades” of black. Will you still value all of those jackets in five years time? How about 15 years? Do they all really “spark joy”? Or is it time to rethink what’s important, and have the cash available for those things instead?
Knowing how much to save for retirement can be difficult for a few reasons. First, although life expectancy is increasing in the U.S., many people underestimate how long they’ll live, leaving them with less cash in their later years than anticipated. Second, new retirees often find themselves uninformed and unprepared for the cost of withdrawals from 401(k) plans, IRAs, pensions, and some social security benefits. This can result in lower disposable income throughout their retirement. And lastly, people underestimate exactly how much money they’ll need to enjoy a comfortable retirement.
With the help of a fiduciary wealth adviser, you’ll be prepared for the basic costs of retirement and be able to avoid any costly surprises. But how can you focus on comfort? Well, did you ever consider that your version of comfortable today might not match your version of comfortable in the future? With your new found “freedom”, perhaps you’ll want to travel, exercise or indulge in your hobbies more. So as you plan your retirement, it’s worth taking your values into consideration and asking yourself some important questions:
- What are the five most important things in my life right now?
- Which five aspects of my life do I think will be the most important when I retire?
- How could my current spending habits be negatively impacting my future retirement lifestyle?
- How will my spending habits need to change when I retire?
While it’s impossible to predict the future, there are certain precautions you can take (and resources you can use) to help provide the comfortable lifestyle and new free time possibilities you want to explore in retirement.
Smile Today, Frown Tomorrow?
In his 2014 article from the Journal of Financial Planning, David Blanchett identified a retirement spending pattern which he coined the “retirement spending smile”.
The retirement spending smile represents a decline in spending from the start of retirement until age eighty-four, and then an increase in spending from age eighty-four onwards. The pattern occurs because retirees spend a large portion of their savings on leisure and entertainment at the start of retirement, but reduce spending in these areas as they age. However, from age eighty-four, health costs tend to increase, eventually overtaking any cost reductions made elsewhere.
Most experts recommend that you shouldn’t withdraw more than 4 percent of your total retirement savings in the first year because you might be withdrawing money faster than it can grow. For example, if you’ve saved $1,000,000, you shouldn’t withdraw more than $40,000 in your first year.
According to the Bureau of Labor Statistics’ 2016 Consumer Expenditure Survey, the average household spends around $1,803 per year (or approximately $150 per month) on clothing and clothing-related services (e.g. tailoring and dry cleaning). This equates to almost $40,000 in a twenty year period. Or, the possible equivalent of one retirement year.
To ensure that your pre-retirement and initial years’ spending in areas like fashion is not going to end up in a retirement spending smile – or a real-life frown – make sure that you’re budgeting, and saving in line with your values, and maintaining a long-term perspective.
The Future Cost of Fashion Spending
If you’re unsure of how much you spend on clothes per year, take some time now to review your clothing expenditure:
- Off the top of your head, how much do you think you’ve spent on clothes in the last twelve months? (Twelve months is the best timeframe as it accounts for seasonal changes.)
- Review your banking history. Approximately how much money have you actually spent on clothes in the last twelve months?
- Was it more, equal to, or less, than you expected?
- What’s the total compared to the cost of that vacation you’ve been itching to go on?
- Multiply the actual amount you spend by 20. This is how much you could spend on clothes in a twenty year period.
- How would you like to spend this amount of money in your retirement?
- Set yourself an ambitious clothes budget for the next six months and keep track of your spending habits with a money management app (Mint and Pocketguard are a few examples).
Although it’s important to enjoy the present, knowing your values will help to prioritize as you plan for retirement: is it more important to have a new coat or shoes every other month now? Or, a comfortable retirement where you can splash through your bucket list every year?
What was important to you during the thick of your career may not be as important to you when you retire.
Define your values to determine what parts of your professional life (and the spending associated with it) still serve you, and what can be reallocated to a more fulfilling and comfortable retirement.
Discover what else you need to consider when retiring in our 30-day Free Money Course.