The Retired Person's Guide to Managing Expenses
Entering retirement doesn’t mean carefree spending. You can only spend 4% to 5% of your retirement funds each year to avoid the risk of running out of money when you’ll probably need it most.
If you’re like the majority of Americans – behind on contributions to your retirement funds – 4% to 5% may not be much. That makes managing retirement expenses all the more important. How should you do it?
There’s an App for That
Actually, there are many apps that will help you record, organize and track your expenses. Two good ones are Mint Personal Finance and iSpending Expense Tracker, both of which are free. Click here for a chart that compares these apps with others. Not all apps work on iOS, Android and Windows phones; iSpending, for example, is for iOS systems only.
“For years, I’ve personally used and recommended mint.com,” says David S. Hunter, CFP®, president of Horizons Wealth Management, Inc., in Asheville, N.C. “We also suggest either Quicken or YNAB (You Need a Budget). We do not push budgeting as much as we urge our clients to have the knowledge and/or data for how much their expenses are.”
Know Your Dates
As you reach retirement, you will hit a number of key dates (The information below assumes that you don’t have a condition that qualifies you for disability benefits.)
Social Security – To receive full benefits, you have to reach normal retirement age (NRA). Your NRA depends on the year you were born. Look at this calculator to determine your NRA. You can receive partial benefits starting at age 62, but that decreases your payout over time. If you wait to collect until 70, your benefits are higher. See Types of Social Security Benefits and Using the Social Security Website to Get Answers.
Medicare – When you reach age 65, you’re eligible for Medicare. You should start signing up three months before your birthday month, and there are additional deadlines for signing up for Medicare Part D, the prescription drug benefit. In most cases you’ll starting receiving benefits on the first day of the month you turn 65. See Medicare 101: Do You Need All 4 Parts? and Medigap Vs. Medicare Advantage: Which Is Better?
Retirement accounts – For most accounts, you can begin taking out money at age 59½ without a penalty. You’re mandated to start taking a required minimum distribution (RMD) at age 70½. Roth IRAs are exempt from the required minimum distribution rule.
Know Your Numbers
As time and economic conditions change, you'll need to adjust your budget. A little simple math will keep you on track.
Understand rebalancing – Rebalancing is making small changes to your investment portfolio in response to changes in its value. If your stock portfolio rises in value so much that it’s out of balance with other investments, you might want to sell some of your stock and invest the proceeds elsewhere. Same with bonds or most other investment types. A retirement portfolio should be somewhat conservative – you have fewer years to recover if the stock market drops – but you or your financial adviser still need to keep your portfolio balanced. For more on this, see Types of Rebalancing Strategies.
Give yourself a raise each year – Inflation causes your money to lose some of its buying power each year. “The value of a dollar today will be considerably different in the next decade, as well as over a 30-year retirement period,” says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla. Because inflation causes goods and services to rise in price, you should give yourself an annual raise. You might withdraw 4% the first year, but after that some experts recommend multiplying the amount you take out by 1.03 each year.
Here's how it works. Let's say that 4% adds up to $20,000 for you so that's what you withdraw in the first year. For the following year, multiply $20,000 by 1.03 to come up with a withdrawal of $20,600. Then, multiply $20,600 by 1.03 for how much you'll take out the year after that ($21,218), and so on.
Make sure you're not spending less than you need to – People living off a retirement account are most likely to overspend, but you can underspend as well. Don’t deprive yourself of essentials such as healthcare, maintenance to your home and appropriate food. To assess where you are, see 7 Signs You're Spending Too Little in Retirement. If you're spending very little because your resources truly aren't enough to cover your expenses, investigate the public programs designed to help retirees. For details, read Laws That Help Low Income Retirement.
And, of course, budget – Unless you saved more than you'll need to outlive the fund, you should be tracking every expense against a detailed budget.
“Maintaining a budget is crucial during both working and retirement years. A great starting point is to separate out non-discretionary spending, which includes items like a mortgage (if you have one), utilities, etc., from discretionary spending. That gives you a basic baseline in terms of necessary expenditures. Whatever is left over can be geared towards whatever else you want to accomplish or enjoy,” says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”
If you weren't the budgeting type before retirement, become one now. Investopedia's Budgeting Basics Tutorial can help.
The Bottom Line
Unless you saved more than the amount you'll need to outlive your retirement funds, you'll need to work with the funds you accumulated during your working years. You may decide it makes sense to continue working as long as you’re able – at least part time. You need a budget and it is essential to closely track changes in government benefits.
With careful management, you should be able to enjoy many of the things you’ve always wanted to do once you leave the full time workforce. Good money management makes traveling and other leisure activities possible. Experts think it's healthy – see Retirement Travel: Good and Good for You.