Preparing for retirement takes decades of time and effort, including all the thought that goes into making investments. But a lot of people don’t think nearly as much about their retirement income, or how they will spend—or fund day-to-day living—once they’ve gotten there.
“All our working lives, we’re making money, saving, and investing,” says Angel Bolton, a Wealth Planner with Wells Fargo Private Bank. “We don’t necessarily worry about the changes that come with retirement: generating income from our wealth and understanding how we spend our money.”
Looking at your cash flow isn’t necessarily an easy task, especially for those with higher income. But it’s a critical step in preparing for retirement.
“It’s important to have a good idea of your income sources, and a spending plan,” Bolton says. “It helps to find the right balance so that you don’t deplete your savings and threaten your goals.”
Here are some tips for plotting out a smart strategy for retirement income and spending.
1. Start with your ultimate goals
Maybe you want to create a legacy for multiple generations so your children and grandchildren can enjoy wealth you’ve generated. Maybe you have been dreaming of doing more in retirement to support a cause you believe in strongly. Or you may be keeping a list of travel and other experiences you’re ready to dive into at retirement.
“Most people hope to do some or all of those things,” Bolton says. “Start from those big goals and priorities, and a sense of how much you need to make them happen. Then work backward from there.”
For example, let’s say your legacy is your biggest priority. Prioritizing that while still optimizing other retirement goals means generating a regular stream of income that meets your needs and wants. Learn more about legacy planning in “Essentials of Wealth Transfer.”
2. Be honest
You’ve probably read that in retirement people tend to spend 70 to 80 percent of what they spent before they retired. That’s not always true.
“When it’s all said and done, you’re probably going to spend as much in retirement as you did before,” Bolton says.
How you spend money is likely to evolve over your retirement years, as well. Early on, most retirees tend to spend a larger proportion of their income on leisure—experiences, vacations, eating out. Later, this shifts, and spending on leisure goes down while spending on health care goes up.
Rising health care costs should be an important consideration in your retirement income plan, Bolton says. Specifically, make plans that match where you want to or need to live as health issues arise. The costs of staying in your home with senior-oriented accessible features and help from a care assistant or housekeeper should be part of your plan. Thinking of moving to a retirement community? These costs rise every year and can impact virtually any size nest egg because many of them are not covered by Medicare or other insurance plans. (For more details, see “5 Key Questions to Ask When Choosing a Continuing Care Community.”)
3. Run a stress test with your investment professional
By consulting with your advisors, you can get an idea of how variables you can’t control—such as market downturns and major life events—may impact the likelihood of reaching all your goals. You don’t know how long you’ll be healthy or how long you’ll live, so the goal is to develop a solid plan that accounts for potential needs over a span of several decades.
Monte Carlo simulations randomize thousands of potential outcomes, providing a snapshot of where your portfolio could stand over time. There will likely be years when you lose money and others where you gain, so you will want a long-range view.
“Seeing the possibilities may help you figure, for example, how much you can gift to a family member this year,” Bolton says. “It can help you plan for a wide range of outcomes and wrap your arms around the best way to manage cash flow.”
4. Plan to spend
As you plot out your wealth strategy, consider how, and in what order, you’ll access your assets in retirement. “Taxes are a big issue when it comes to this planning,” Bolton says. “And so is the potential for future gains—or losses—on various investments.”
The combination of planning your asset allocation and getting a handle on retirement cash flow may also help you think about larger issues, such as when to pass on or sell your business, real estate holdings, or other assets.
There isn’t a one-size-fits-all strategy for what assets to tap and when or how much. You and your wealth and tax advisors can plot out the tax repercussions and opportunity costs of pulling income from different sources at different times.
Bolton does have one reminder about planning how you access your money: “Always keep liquidity top of mind. Make sure illiquidity doesn’t cost you.”
5. Stay on top of your plan
Just as you likely do for your entire portfolio of investments, be sure to regularly review your retirement income and outflows. If you spend too much in one year or you’re not spending as much as you thought, you can use the review to map adjustments.
“If the market’s down, as it was for a lot of people in 2018, what does that mean for the long haul?” Bolton asks. “Monitoring your plan, and adjusting it as you go along, is just as important as having one.”