We all know by now that there’s no such thing as a one-size-fits-all retirement plan.
Hopefully we’ve all also realized that there’s a lot more to retirement planning than just making sure we have enough money saved up.
Even with a significant nest egg saved up, great group of peers entering retirement around the same time as you, supportive and involved family members, and plenty of hobbies to keep you busy, there’s still something missing.
Luckily for you, I’m here to help!
Gallup’s annual survey on what Americans’ biggest financial worries are has found that once again, retirement comes in first place once again (topping the list for the 16th year in a row).
So clearly, Americans are plenty worried about retirement and having enough money to retire the way they’ve planned/ hoped for.
Now we can hope that all of that worry leads to Americans being extremely prepared and saving for retirement well ahead of time.
The truth is, though, even if you’ve been saving for several decades and have a substantial amount set aside, you still need to have a spending plan.
Each retiree is different, and the spending plan that’s right for you won’t necessarily be the plan that’s right for someone else.
While the more money you have means the less you might have to worry about fixing to said plan, it’s still helpful and important to enter retirement with a spending plan that will allow you to have the retirement you’ve been dreaming of.
For our purposes, you have three separate spending plans to choose from for your retirement: fixed spending, increased spending, and dynamic spending.
Now keep in mind that these spending plans will be for the entire duration of your retirement.
While there’s nothing preventing you from switching plans down the line, you’ll live your best and most fulfilling (and least worrisome) retirement if you choose a plan and stick to it for the entirety of your retirement.
It’s important to remember this, because when you decide on a spending plan and a budget, that comes from the entirety of your retirement savings—pension, IRA, 401(k) and social security, so there’s unlikely to be any surprise money coming your way to help you out of a tight spot.
Fixed spending is somewhat self-explanatory, and refers to deciding on a budget that will remain the same month-to-month and year-to-year.
While fixed spending can work well to give you a feeling of control, it’s also important to keep in mind how you’ve pictured living your retirement and what kinds of things you want to do.
Fixed spending means you will spend exactly the same amount every month, regardless of extenuating circumstances.
You can calculate how much all of your retirement savings would allow you to spend each month, assuming you’ll be retired for 25 to 30 years.
The fixed spending plan leaves very little room for error, so it’s important to really understand the lack of flexibility with this plan.
Increased spending is often a more forgiving and realistic spending plan when you’re in retirement.
Increased spending means you will slowly spend more and more as the years go by.
This is often seen as a more realistic spending plan since it allows for inflation rising and increasing healthcare costs as you age.
However, there is also something to be said for things balancing themselves out in retirement—when you first enter retirement, you’ll likely still be active, and suddenly trying to fill your days with things.
Because of that, you’ll likely spend more money on vacations and experiences when you’re still active and mobile than when you’re older and moving around get to be more difficult.
In light of that, you could argue that you’ll just replace the money you were spending on vacations with your healthcare costs.
However, in our often unpredictable world, it’s always nice to have a little cushion for when years get rougher, which is why I recommend the increased spending plan.
You don’t know what unexpected costs might come up later in your life, or the effect the economy will have on your savings, so being prepared is always a good idea.
For example, if you know you’re going to travel to be with families during the holidays, or you want to take an annual cruise every summer, then you will likely pend more during December and the summer months.
This is acceptable in the fixed spending plan, but the amount you set aside for each of those periods has to be the same year-to-year, and the extra you spend will have to be taken away from other months.
The final type of spending plan is dynamic spending. As you might guess, dynamic spending refers to spending that is much more flexible than both previous plans.
Dynamic spending takes into consideration that expenses often don’t remain the same month-to-month because our activities don’t remain the same.
You might want to spend the holidays visiting your family, and spend summers taking an annual cruise.
If that’s the case, you’ll likely been spending more in December and the summer months than you would when you’re staying closer to home.
Dynamic spending revolves around a floor-and-ceiling budgeting method.
Each month, you can spend any money within that floor and ceiling you’ve decided on. For more expensive months, you can feel free to hit the ceiling in terms of your budget, while cheaper months will allow you to make up for that by sticking closer to the floor.
The dynamic spending plan does require a little more oversight and tracking of your expenses, since every month you hit the ceiling of your budget will need to be matched with a month where you stay at the bottom of your spending.
Overall, though, dynamic spending allows for more flexible expenses and is more accommodating of surprises and unforeseen circumstances.
No matter which spending plan you choose, having a budget that you’ve decided on before you officially enter retirement will help ensure you get the retirement of your dreams.