The Impact Spending Can have on Your Retirement

Common financial advice about retiring often focuses on how much we should be saving in order to live comfortably once we stop working. You may have heard tips about how to save extra money for retirement, such as sticking to a budget, delaying impulse purchases and logging your spending. Saving is important, but the truth is that your spending habits are just as important as your saving habits when it comes to retirement. In fact, many people find it more effective to start their retirement planning from a spending perspective. By thinking carefully about what you will spend in retirement, you can create more objective savings goals and feel more motivated to stick with your savings plan. 

Why Expenses May Rise in Retirement 

Have you thought through how your spending might change after you retire? There are many simple retirement budgeting rules people like to follow, but they may not work for you. Your retirement is as unique as you are and understanding how your expenses might change as you age is the first step to starting healthy retirement spending habits. While you may save on some expenses, like public transportation and dry cleaning, there will also be new expenses that arise after you stop working such as health care, health insurance or long-term care expenses.  

In fact, studies show that retirees increase spending in early retirement. Maybe there’s a trip you’ve always wanted to take, or you finally want to buy yourself that luxury vehicle. People often see increased spending in travel and shopping expenses when they have more free time. You may start eating out more or spending more on entertainment. A lot of retirees treat every day like Saturday when they are retired.  Additionally, you may have increased tax expenses as you begin withdrawing funds from investment accounts. You’ll also continue to experience the effects of inflation throughout your life, which means the money you save now will be worth less relatively in the future if it doesn’t keep pace with inflation. 

Later in retirement, most people see increased healthcare costs. No one likes to think about getting older and potentially needing help, but it’s important to have a financial plan in place to cover expenses and avoid burdening your family with the cost of nursing homes, in-home care, or medical procedures. If offered by your workplace, an HSA is an excellent opportunity to set aside money for health care or retirement on a regular basis. However, there are other investment strategies you can use to set aside money for healthcare expenses before you retire.  

It’s important to consider all of these expenses as you plan for retirement. Simply saving a certain amount based on popular advice isn’t enough. You need to examine your current spending habits and consider how they might change through the rest of your life in order to have a thorough approach to retirement.  

How to Spend for a Comfortable Retirement 

The secret to comfortable spending in retirement is creating a realistic budget and sticking with it. By doing so, you won’t have to worry if you’re spending too much or not enough to enjoy retirement. You’ll know exactly where you stand each year in comparison to your total budget. Following a budget may not sound appealing, but it’s truly the best way to have peace of mind when spending in retirement.  

Having a budget doesn’t have to mean living a minimalist lifestyle. There can certainly be room for travelling and luxury purchases, as long as you make room. When creating your spending budget, be sure to include any large expenses you know you’ll incur. This could be necessities, like replacing your roof in the next few years, or simply things you’ve always wanted but didn’t have time for while working, like new hobbies.  

There are many common retirement spending and saving rules people cite. You may have heard people say you should plan to spend 80% of your current paycheck each month and that’s how much income you’ll need to replace after you retire. Or, you may have heard that you should spend 4% of however much you have saved after you retire each year and adjust for inflation. Rules like this are a great starting point, but they may be oversimplified and too strict for a lot of people. It’s better to create a personalized spending schedule based on your financial situation, known upcoming expenses, and investments.  

How you save for investments will also dramatically impact your retirement. A diverse investment portfolio that includes broadly diversified investments can make a huge difference, especially towards the end of your retirement. Allocate your investments in a way that you are comfortable with but remember to think long term. Working with a financial advisor can help you better understand your investments and feel more comfortable taking some risks.  

It’s important to note that your budget can and most likely will change over time. Try not to feel frustrated if and when unexpected expenses arise. Simply adjust your budget and move forward. As inflation rises and your spending habits change, you’ll need to revisit your budget on a regular basis and ensure you’re still on track.  

Key Takeaways 

To summarize, creating a plan and maintaining careful spending habits is a critical component of a happy retirement. As you begin seriously thinking about retiring, you should examine your current spending habits and consider how they might change before deciding on a dollar goal you’d like to reach before retiring. Be sure to plan for any large expenses you know will come up in the next few years, such as home renovations, travelling, or big purchases. These expenses can absolutely fit into your retirement budget so long as you plan ahead. Don’t forget that your budget can and will change over time due to fluctuations in spending and investments, taxes, and inflation.  

Creating and sticking to a budget may sound stressful, but it’s one of the best ways to take care of yourself and your family and allow you to reach your short-term and long-term goals so you can enjoy a relaxing retirement. If you need help creating your budget, it’s wise to invest in assistance from a financial expert. They can help you understand your current financial standing and make a plan to achieve your retirement goals. 

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Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.