This post once again takes on the so-called experts who say that most retirees aren't smart enough or motivated enough to properly manage their spending. For some reason, they believe that individuals who have managed to live within their means prior to retirement (and even save money) will no longer be able to do so during retirement. I believe that with a little bit of effort and the tools provided in this website most retirees can do a reasonably good job of managing their spending in retirement. It is really as simple as following these four steps:
Step 1: Develop a Reasonable Budget--Using one of the spending spreadsheets and the recommended assumptions set forth in this website, determine how much total income you can spend for the upcoming year (from Social Security, pensions, annuities, withdrawals from accumulated assets and income from employment). To determine your "income" from withdrawals, you may need to adjust your current accumulated assets for events expected to occur in the future. For example you may add the present value of amounts you expect to receive, such as gains from downsizing your home, expected inheritances, re-payments of loans owed you, etc. Conversely you may subtract the present value of such items as future loan repayments you owe or amounts you wish to set aside for unusual future expenses (as discussed in the previous post). The June, 2014 article in the articles and spreadsheets section of this website provides a brief description of how to use the Actuarial Approach to determine a spending budget and includes several posts that provides examples of these adjustments.
Step 2: Determine Your Spending Needs/Living Expenses For the Upcoming Year--Most retirees keep track of their expenses, so they have a pretty good idea of normal living expenses. To this amount add an estimate for other expenses you expect to incur. Don't forget to include taxes that you may need to pay.
Step 3: Compare the Results of Step 2 with Results of Step 1 and Make Necessary Adjustments--If the results of Step 2 are higher than the results of Step 1, you may need to reduce some of your expenses for the year or you may need to increase your income. You can increase your income by working more or you can revisit the assumptions used to develop your budget. For example, you may be comfortable developing a budget that is not expected to remain constant in real dollar terms from year to year, so this adjustment may increase your spending budget for the current year (at the expense of reducing it for future years, all things being equal). Alternatively, you may simply decide that it is not important to have your expenses match your budget for the upcoming year.
Step 4: Repeat Steps 1-3 at Least Once Per Year--This is not a "set-and-forget" process. You need to periodically (I recommend doing this once each year at the beginning of each calendar year) revisit the three step process described above to reflect investment gains and losses, changes in assumptions, deviations of actual spending from the budget or other changes. I recommend using the recommended smoothing algorithm in this website for this purpose. Under this smoothing algorithm, you generally increase your budget by the increase in inflation over the previous year unless your budget falls outside a 10% corridor around the "actuarial value" produced by the spreadsheet. Depending on actual results, your budget may increase or decrease from year to year.
That's it! Yes, it takes some work and some discipline but after the first time it will probably take you less time than you take to plan your next trip, fill out your NCAA tournament brackets or make your fantasy league picks.
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