After slaving away in the workplace for countless years and working to beef up that nest egg, you've decided not to leave behind a single dollar of your hard-earned cash. Good for you. Maybe you have just enough saved to get you through retirement, or perhaps you've determined that none of those ungrateful so-and-so's in your family deserves a single red cent. Regardless of the reason, you've chosen to follow the increasingly popular Spend-Every-Penny Retirement Plan.
Now comes the challenge: you'll have to walk the line between overspending and underspending your retirement funds. And as many other retirees who have taken the Spend-Every-Penny path can tell you, it's a precarious balancing act. It all comes down to careful planning, plotting and calculating. Here are a few tips on how to spend all your cash without running out before your number's up. (For background reading, see Your Retirement Income: Will It Be Enough?)
1. Plan for a long life
When you're following the Spend-Every-Penny Retirement Plan, you should go ahead and assume you'll live a long life, especially if you're relatively healthy. Take a look at life expectancy tables and find the average lifespan for your age. Then, just to be safe, add several more years to it. If it looks like you could live to the ripe old age of 90, you probably shouldn't drain your nest egg within the first five years of retirement. (Unless, of course, you plan to take up some dangerous post-retirement hobbies like sky diving, swimming with sharks and rock-climbing. In that case, spend away.)
As the world of medicine continues to improve, life expectancies keep rising. Recent estimates give a healthy 65-year-old man a 24% chance of living to at least 90 and a healthy woman a 35% chance of living that long. Statistics also show married couples generally live longer than their single peers. So if you're married, you should add a couple more years to your life expectancy.
You should also consider your family's history. Did Grandma Rose and Grandpa Oscar live to see their 100s? If so, you may want to tack a few years onto your estimate. Thanks to today's healthcare advances, you'll probably live several years longer than your parents and grandparents. (For more insight on this calculation, read Life Expectancy: It's More Than Just A Number.)
2. Add it up
Tally up all the sources of income you'll receive at your retirement age, including Social Security income, pension income and any investment income from retirement funds, annuities and savings accounts. For example, let's say you expect to receive the following income at the age of 66:
- Social Security: $15,600 a year
- Pension: $10,800 a year
- Investment income: $37,200 a year
These three sources of income add up to a total of $63,600 a year. Cha-ching! If your current living expenses are about $50,000 a year and you want to maintain (or possibly improve) your standard of living, you're as good as gold right? Not so fast. You haven't factored in taxes or inflation.
3. Don't Forget Uncle Sam's Cut
We all know that Uncle Sam loves to tax investment withdrawals, but there are some clever tricks you can use to save yourself a bundle in taxes. First of all, before you tap into tax-advantaged accounts, you may want to drain your taxable retirement assets first. This will allow you to make the most of the tax-favored accumulation of those tax-advantaged accounts.
Secondly, don't forget to withdraw the minimum from your IRA. Once your IRA reaches the distribution phase, you are expected to withdraw a minimum amount each year and pay taxes on that amount. (The calculation for minimum withdrawals is based on your expected lifespan.) If you do not withdraw the minimum amount, you could face some hefty tax penalties.
4. Factor in Inflation
As you work through your retirement calculations, don't forget to figure inflation into the equation. While you may think $50,000 a year would be enough to cover all your expenses right now, the purchasing power of that amount of money will continue to diminish over the years.
Look at it this way: cost of living generally increases by 4% per year. With a 4% rate of inflation, if you currently spend $50,000 a year on living expenses, you will need about $90,000 in 15 years to attain the same standard of living. That's a $40,000 difference! Assuming inflation continues at this rate, you will need about 4% more each year to ensure a rich retirement.
5. Start Spending
If you aren't hung up on the idea of "leaving a legacy," there's no need to invest in life insurance plans or trusts. That means more money for you to spend! Go ahead and plan that Alaskan cruise you've always dreamed about or buy that beach-front condo in Florida. Join the fancy country club and wine and dine at the most exclusive restaurants in town. Shoot, you may even want to buy a few nice gifts for your kids and grandkids (especially knowing they're not getting an inheritance from you. Shhh …)
Of course, you'll still have to make sure your nest egg will last the rest of your lifetime, so it's still important to keep your spending in check. Which brings us to rule No.6.
6. Don't Overspend
It would be wise to develop a strict retirement expense plan, including an annual withdrawal rate. By setting limits on how much money you can take out and spend each year, you'll ensure that you don't spend too much. Many retirees withdraw somewhere between 3-5% of their retirement assets each year to fund all their living expenses. Of course, the perfect percentage depends on your unique situation, but that range provides a good starting point.
While the Spend-Every-Penny Plan is definitely a desirable retirement route, it can also present some interesting challenges. If you're not sure how to walk that tightrope between living well and hitting broke before you die, meet with your financial advisor. Just don't let him talk you into leaving "a little something" behind for your loved ones.