Spending and budgeting during retirement
Budgeting during retirement can be difficult. Here are the big steps people should pay more attention to.
Setting (and sticking to) a budget, monitoring income and establishing savings are three of the basics of building a sound financial equation for adulthood. But when it comes to post-work years, many people are unsure of how to tackle budgeting for retirement. They're no longer earning a salary and instead are dependent on retirement savings. They want to enjoy post-work freedom but may not be sure how to balance spending on travel, hobbies and more with all of their retirement savings. All of that translates into lots of questions around retirement spending strategies.
What milestones can the almost-retired and already-retired make to enjoy retirement to the fullest — and create a retirement budget they can live with?
Retirement milestone #1: Establish a retirement budget and boost savings
Sounds basic, of course, but budgeting really never stops and is particularly important during retirement when income streams may be more limited. In addition, retirement opens lots of windows for travel, hobbies and volunteering, so it's important to create retirement spending strategies that allocate income for extra pursuits as well as basic needs (e.g., housing, insurance, etc.) that never go away. For those who can clearly see retirement on the horizon, age 50 and above is a good time to boost retirement savings, thanks to the catch-up provision that allows bigger contributions to IRAs and 401(k)s.
Retirement milestone #2: Withdraw from retirement funds
A revolutionary shift in how we save for retirement began in 1980, after Congress enacted 401(k) legislation. Today's retirees are the first to have to determine how to draw from 401(k)s and IRAs as they figure out how to make a retirement budget and provide themselves with a stream of income in retirement, says Geoffrey Sanzenbacher, associate director of research at the Center for Retirement Research at Boston College. In a 2019 poll, 79 percent of retirees said they didn't have the investment skills to ensure that their retirement savings would last throughout retirement.
As a result, many of today's retirees appear to be doing too little to use the savings they've accumulated, Sanzenbacher says: "We used to worry that people with 401(k)s would spend all the money. But what we're seeing is that, if anything, they don't draw down enough." The reason — "It's a complicated decision to draw money out of a big pile," he says. "And it's not something people have ever done before. They've spent their whole lives trying to avoid that."
One option, Sanzenbacher says: When you turn 65 and sign up for Medicare, also make a retirement budget that determines an amount from your savings to shift into annuities that will pay out like a salary. "I'd do it as a set-it-and-forget-it kind of thing," he says.
And while the percentage will vary depending on your lifestyle, your savings, your health and other factors, one option would be placing a portion of your retirement savings in annuities for day-to-day living and investing the rest as a hedge against health issues you might need to pay for down the road.
Retirement milestone #3: Withdraw from Social Security
Generally, you can start your withdrawals as early as age 62. However, doing so means that you'll reduce your benefits — permanently. If you wait a few years — until your full retirement age — there is no reduction in benefits. In fact, every year that you wait past age 62 significantly increases your benefit level. For example, waiting until age 66 increases your benefits by 27.5 percent, but delaying until age 70 boosts that by a whopping 76 percent.