Retirees usually have bucket lists and dream vacations they want to go on while they’re still healthy and fit.
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But after trips and possibly many dinners out over the past four years, it sounds like you’re suffering buyer’s remorse. The good news is you realized you’re jeopardizing your ability to fund the rest of your retirement, and you can take steps to protect your financial well-being before it’s too late.
Many retirees are spending more than they planned
About a third of retirees say they’re spending more than they expected on travel, entertainment and leisure and over half say their overall expenses are higher than they expected, according to the 2024 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI).
Despite this, “74% of retirees are confident they will have enough money to live comfortably throughout retirement.”
However, their confidence may be misplaced.
The first years of retirement tend to be the most expensive on average, according to a Consumer Financial Protection Bureau (CFPB) report. But this is not, as commonly believed, because retirees no longer want to spend on travel and entertainment. Rather, it’s due to an inability of many to maintain that level of spending.
Those who had to rein in their spending “reduced their expenses 28% from the first year in retirement to the sixth year in retirement.”
Still, this isn’t necessarily a bad thing. Because our health will inevitably decline as we age, we may have more energy, mobility and strength to pursue leisure activities and travel in our early years of retirement.
Doing so, however, will require careful planning to ensure you remain comfortable throughout retirement and are able to fund a potential increase in medical expenses in later years.
Getting back on track
To ensure you have income throughout your retirement, determine a sustainable rate at which you can withdraw from your retirement savings.
A common rule of thumb is the 4% rule. It says if you withdraw 4% of your investment portfolio in the first year and then this same amount plus an adjustment for inflation in each subsequent year you have a low probability of running out of money for 30 years.
In your case, you could determine today how much of your retirement savings remain and begin employing the 4% rule from this point forward. This will likely mean you have to cut back on spending, but it could help ensure you remain comfortable throughout your retirement.
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This rule can be a useful starting point — and 61% of financial advisors use it, according to research from PGIM DC Solutions. Still, it isn’t perfect, and each person’s situation is different, so you may find that a different withdrawal strategy works better for you.
For instance, you might want to use the percentage of portfolio strategy, where you withdraw a fixed percentage of your portfolio’s value each year. This means your income will fluctuate each year with the market value of your portfolio.
If you follow a fixed-dollar withdrawal strategy you’d withdraw a fixed dollar amount every year for a set time and then re-evaluate.
Optimizing your financial strategy
You want to make sure your portfolio asset allocation reflects your investing horizon and risk tolerance. You may want to consider speaking with a financial advisor about your situation. Many advisors today have modeling tools at their disposal that allow them to run personalized economic and life scenarios to help determine the best withdrawal strategy.
An advisor can also help with other retirement income withdrawal considerations, such as the amount of income you’ll be receiving from Social Security, your required minimum distributions from 401(k)s and IRAs, and how much to take — and when — from each type of account and asset class to be as tax-efficient as possible.
As you get serious about spending responsibly, you may want to reevaluate your lifestyle and earn some additional income. Creating a budget and tracking expenses can be valuable tools in determining where expenses could be cut back.
To earn additional income, you could take on a side hustle or part-time job. If major changes are needed, you may want to consider renting out a room, sharing a place with a friend or even moving to a less expensive area. Other options you might consider are accessing your home equity and borrowing against the cash value of a life insurance policy or even selling it.
There’s nothing wrong with taking advantage of your good health early in retirement to live a little. But if you get off track financially, acknowledging the issue and tackling it right away can help to ensure a comfortable retirement in your later years, too.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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