Needs vs. Wants: Balancing Cash Flow in Retirement

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When it comes to retirement, lots of people picture a laidback lifestyle where they slow down and enjoy the moment. They talk about downsizing and moving somewhere warmer, spoiling their grandchildren, and doing exciting things (like traveling) that they didn’t have time for during their careers.

They assume their lifestyle will change dramatically after they retire, and consequently, many people also assume their spending habits will change. In fact, one of the biggest misconceptions people have about retirement is that they’ll spend less than they do during their careers–when in our experience, people tend to spend the same or even more in the first ten years of retirement.

Sure, some costs like commuting might be eliminated, but others increase. That’s because in retirement, every day is Saturday, and that opens more opportunities for spending—you might spend more time eating out, golfing, shopping, traveling, and participating in other hobbies that cost money.

Consequently, it’s important to look at your retirement budget realistically and determine what your necessary expenses are; that way, you can wisely plan for the “fun stuff.”

Calculating “Needs” in Retirement

The necessary expenses you’ll have in retirement are much the same as your basic needs now—shelter, food, healthcare, transportation, and debt obligations. But when establishing your retirement budget, it’s important to remember there are variables that could alter these expenses—like inflation, cost of living in a new area, and a new lifestyle.

If you move somewhere where the cost of living is cheaper, you might spend less on housing; but if you decide to eat out more often, you might spend more on food. Knowing where you’ll live will help you better determine your expenses, since your location will affect not only the cost of housing, but other necessities like food and transportation. It’s also important to understand what kind of health insurance you’ll have (Medicare, a company plan, or something else) so you can determine the costs associated with it.

Paying Necessary Expenses in Retirement

For many people, it helps to receive a steady income in retirement to pay these necessary expenses. Social Security and pensions are the most common sources of “guaranteed” retirement income, and they can be a helpful way to manage cash flow because receiving the payments is similar to how one might receive a paycheck during their career. You can also supplement these guaranteed income sources with vehicles like income annuities.

Calculating “Wants” in Retirement

Additional expenses, of course, depend on the individual person and their desires. You might spend extra money on vacations, gifts, shopping, or new hobbies like painting or cooking classes. Some hobbies (like boating or restoring classic cars) are obviously more expensive than others.

(In our work with clients, we’ve found that the most overlooked “want” is a car. Sure, a Mercedes gets you from point A to point B, and in that sense, it’s a necessity—but a Honda can achieve the same goal, and sometimes for hundreds of dollars less each month.)

To calculate your “wants budget,” we recommend tracking your expenses for at least three years prior to your retirement. There are several online tools that can help you do this automatically, but you can also use a simple spreadsheet. If you’re close to retirement and haven’t tracked your expenses, our firm can pull your expenses from the past couple of years retroactively.

Knowing what you spend now will give you a general starting point that will help you determine your spending habits in retirement.

Retirement Expenses: Planning Tips

Here are some tips to help you plan wisely so you don’t encounter unwanted financial surprises during your retirement:

Complete a Cash Flow Worksheet

One of the best planning exercises you can do is to complete a cash flow worksheet. In this exercise, you first record what you think you currently spend; then you pull your expense data and review the real numbers. You might confirm what you already thought (which gives you confidence to move forward with planning), or you might be surprised by what you discover. Either way, it’s important to have as much data as possible to help you plan.

Review Your New Salary

When you retire, you’re essentially starting a new “job,” and that job comes with a new salary—your guaranteed income sources (pensions, social security, etc.). It’s important to review your retirement income and determine if it meets your current needs. If your income sources don’t offer enough cash flow to pay your necessary expenses, you might want to consider how you can make up the difference—and then take action as soon as possible.

Outline & Schedule Major Expenses

If you have exciting plans for retirement (and most people do), determine how much those plans will cost and when you plan to implement them. For example, if you want to vacation in Europe for three weeks, decide when you might take that trip. Will it be two years into retirement? Five? How much will it cost? Ask yourself the same questions about any major plans you have, whether that’s to help your grandchildren with college expenses or purchase a classic car.

Prioritize Spending

It’s great to dream and have fun, but not at the expense of having to return to work after you’ve been retired for ten years (unless that’s what you want to do, of course!). For most people, the goal is to retire and stay retired. And if you want to avoid running out of money in retirement, you have to be realistic and prioritize your spending. Don’t bite off more than you can chew, and make sure you have your basic needs covered before you start funding the fun stuff.

Maximizing Your Cash Flow in Retirement

Once you retire, it’s important to review your investment allocation—you want a balance that’s appropriate for your risk tolerance and not overly aggressive, as volatility becomes an extreme disadvantage when you’re withdrawing from a portfolio. Depending on your age, marital status, and financial situation, you might be able to leverage an income annuity with a cost-of-living adjustment rider to help you generate more income in retirement.

It's also important to be realistic about how much you can spend and when. Once you’ve created a plan for your expenses, stick to it. That doesn’t mean you can’t adjust your plan, but if you don’t set guidelines ahead of time, you could eventually run out of money.

Make it Easy on Yourself

It’s a pretty basic concept—needs are different than wants. But sometimes the line gets blurry in retirement, so it helps to plan early and budget accordingly. Once you understand the difference, your retirement distribution planning will go much smoother.

That said, recognizing just how much money you need and when can be overwhelming. If you’d like assistance with your retirement planning and distribution strategy, we’d love to talk! You can schedule a consultation with us here.

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This article is intended to be for general information about the topic(s) described only, and should not be used as financial advice specific to your situation. For financial advice pertinent to your lifestyle, goals, risk tolerance and opportunities, please contact a financial professional.

Carmine Coppola and David D’Albero are financial advisers offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. They are Registered Representatives offering securities through NYLIFE Securities LLC (Member FINRA/SIPC), a Licensed Insurance Agency. They are also agents of New York Life Insurance Company. Strata Capital, LLC is not owned or operated by NYLIFE Securities LLC or its affiliates.

Neither Strata Capital nor, NYLIFE Securities LLC and its affiliates, nor its representatives, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.