How Much Can You Afford to Spend in Retirement?

March 16, 2017 at 10:39 PM Leave a comment

As you fight traffic, bosses, and backstabbing co-workers day after day, you probably fantasize about a day when you can build your vineyard, vacation with your spouse, or sit peacefully in your garden. For too many seniors, retirement dreams take a backseat to the realities of inadequate funds. 1 in 3 Americans has no retirement savings at all.

Retirement is no fun if you’re constantly worried about money. No retiree wants to pinch pennies or miss out on their retirement dreams. So how can you tell how much to spend in retirement? After all, you don’t know how long you’ll live. Here are some helpful clues.

Plan for Long-Term Expenses

Health care expenses, including long-term care, are major cost drivers in retirement. You can cut down on these expenses, thereby maximizing the amount you can spend each month, by signing up for Medicare. Late enrollment can mean higher premiums for the life of your Medicare account, so sign up during the enrollment period surrounding your 65th birthday. A few other strategies can help you keep unexpected and long-term expenses under control:

  • Pay down debt as quickly as possible, so that market shifts don’t drive interest payments through the roof.
  • Invest in long-term care insurance.
  • Ensure your home and car are in good working order before you retire.
  • Take proactive steps to maximize the value of any pensions your employer offers—even if that means working an extra year or two to vest.

Try the 4% Rule

Retirement analysts have long suggested a 4% rule as a good guide for retirement spending. It works like this: in your first year of retirement, you can withdraw up to 4% of your savings. In each subsequent year, withdraw 4% plus enough to cover inflation. For someone with a retirement of about 30 years, this will ensure more than enough money—but only with a well-balanced portfolio. Your financial adviser can help you determine whether 4% is conservative, aggressive, or just right given the specifics of your savings.

Make Projections With an Analyst

The amount you can withdraw each month is heavily dependent on the type of investments you have, and how much they are projected to grow. Don’t assume that your investments will continue growing at their current rate. The market always shifts, and downward trends are inevitable. A market analyst can explore how previous trends might predict future changes. This can help you arrive at a reasonable projection of your retirement accounts’ total value. Stay conservative by withdrawing less than the amount your adviser recommends, and it’s likely you’ll never run out of money.

Don’t Forget About Potential Alternative Revenue Streams

Your home is probably your most valuable investment. Particularly if you have a small retirement account or a large number of expenses, it can form part of your back-up plan if you land in financial trouble. That’s why it’s wise to pay down your mortgage can keep your home in good condition leading up to retirement.

A reverse mortgage can help you stay afloat in retirement. If you’re over 62 and own your home, you’re eligible. As long as you obey the loan’s terms, you don’t have to repay it until you leave your home. The money can be used on anything you want, including savvy financial strategies such as paying down debt, buying a vehicle in cash, or repairing damage to a home you hope to sell.

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