No single answer fits everyone. But it’s prudent to plan on spending at least the same amount the month after retirement as you spent the month before, says Ken Sutherland, president of LifePlan Group (www.lifeplangroup.com), an independent Registered Investment Advisory firm.
“I always ask clients to figure out how much they need to pay the bills and enjoy life prior to retirement,” he says. “That’s what they should figure they’ll need.”
Although a big worry is that monthly spending could go up, some factors can actually cause expenses to drop, says Sutherland’s son, Alex, a wealth advisor for LifePlan Group.
“Tax obligations may be less,” he says. “Also, retirees are no longer contributing to a 401k plan or to Social Security taxes, and their mortgage may be paid off.”
The Sutherlands say that when mapping out retirement spending:
• Expect to spend more earlier. Most people are healthier and more energetic in the first decade of retirement, so they may want to budget more for that period. As they get older, expenses may decrease because they are less active. One possible exception is medical expenses.
• Don’t assume a surviving spouse will need less. “For every widow I have worked with who spent less, there were others who spent more,” Ken Sutherland says. “Some of that is because they need to hire help for chores around the house. But they also may do more traveling and more dining out.” Make budget plans with that in mind.
• Use a modest inflation assumption. “Inflation has been high in the past and could be again,” Alex Sutherland says, “but in the near term inflation doesn’t impact you as much, and in the long term you likely won’t spend as much.” If you use a 5 or 6 percent assumption, which is much higher than today’s inflation-rate reality, you’ll conclude you need more money than you likely do. A 2 or 3 percent assumption would provide a more realistic scenario.
About Ken Sutherland, ChFC, CLU, MDiv
Ken Sutherland has been in the financial industry for more then 25 years. He obtained his Chartered Life Underwriter (CLU) designation in 1994 and his Chartered Financial Consultant (ChFC) designation in 2004, both from The American College in Bryn Mawr, Pa. Ken has an undergraduate degree in Business from the University of Oregon and a Masters of Divinity from Luther Theological Seminary. In 2003, Ken founded LifePlan Group (www.lifeplangroup.com) in North Carolina.
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