With so much up in the air these days, the majority of Americans are worried not only about their health, but also about their financial well-being. But while virtually all of us are facing circumstances we haven’t seen in our lifetimes, as a wealth advisor, the concerns I hear about from my retired clients, friends, and family are akin to those I’ve heard throughout my career. More than anything, they are worried about outliving their money.
It’s certainly a reasonable fear, particularly when markets are volatile and daily updates on the pandemic only emphasize that there are no guarantees in life. But that doesn’t mean you don’t have control over what happens to your money. In fact, most of the time, it comes down to a somewhat unsexy—but essential—skill: budgeting.
Many people don’t have a good handle on how much they spend—especially those who have some discretionary income. Just think about it: Do you know how much you spend each week on coffee, takeout, the occasional bottle of wine? Often, those are just a few of the regular expenditures people make without much thought. Now, think about the bigger-ticket items: high-end gifts, vacations—even homes. If you have the cash—or credit—right now, it’s easy to make these purchases without considering their long-term impact.
But we know that people are living longer than ever before, and that means most of us will spend far more time in retirement than the generations that came before us. In addition, though our lifespans have increased, many of us will still face the health challenges that come with old age—from slip-and-fall injuries to cancer. Unfortunately, those challenges come with a price tag as well. If you’ve never looked at the cost of long-term care facilities or a home health aid, take some time to do so now. You’ll see that it may be more than you’ve bargained—or budgeted—for. And with constant reminders that we can’t possibly predict the future, the time to get a handle on your retirement savings—and a plan that prioritizes financial longevity—is now.
Some are comforted by the concept of an itemized budget, a document dictating exactly how much they should spend on the various aspects of their lives, from housing to happy hours. If that works for you, go for it! But for others who are overwhelmed or unenthusiastic about documenting the direction of every penny they have, creating broad strokes may be good enough. The goal is to have guidelines on how much you spend in different areas.
Look at how much you’ve saved to begin with. (if you’re still working, this may be a good time to consider adding more to your retirement accounts if you’re not yet maxing out your contributions). Next, think about the longest amount of time you may realistically live. From there, you’ll get a rough idea of what you can comfortably afford to spend each year. Again, keep in mind that you never know when an expensive issue may arise, so factor that into your allotted spending as well.
Now, it’s time to think about the categories into which your current and future expenses may fall: housing and utilities, food, entertainment, health care, travel, etc. Ask yourself approximately how much you currently spend on each, and how that may change in the future. For example, do you expect your housing expenses to be reduced because you plan to sell your four-bedroom home and relocate to a condo once your youngest child leaves for college? Do you expect travel expenses to go up when you retire from your full-time job and begin island hopping each winter? Will your health care expenses likely grow as your spouse’s degenerative disease worsens? Or are you planning to foot the bill for a grandchild’s private education, taking on a new financial responsibility? These anticipated life changes should be factored into your budget as well.
You may find, too, that your budget itself dictates a change. Perhaps you can’t indulge the way you once planned to during retirement, or maybe the opposite is true: you find you’ve been more frugal than necessary. The bottom line is, when you know where you are–and where you might be headed–you’re far more likely to arrive at your ideal destination. And if you’re unsure about where that is, check out my book, You’re Retired… Now What?