People save and invest for decades leading up to their retirement. But when you finally leave your job, it can be difficult to decide how much of that money you should spend.
Some people are overspenders, while others are afraid of spending too much and live an overly frugal lifestyle. Here’s how to navigate the first year of retirement so you don’t fall into the first-year spending trap.
Why the first year of retirement can be financially disruptive
Many aspects of your life can change when you stop working. You no longer receive a regular check, which means you may be struggling with investment and savings accounts. You may be tapping Social Security, or strategizing how to delay receiving benefits so you can get a bigger check.
You spend your time differently, which can lead to more costs. Your first year of retirement may be filled with deferred expenses for home repairs, appliances or a new car. You may need gear for a new hobby, or want to spend money traveling with the kids and grandkids. You also need to consider the taxes you will pay on withdrawals from traditional retirement accounts. Many retirees also like to travel, which can be expensive.
Although overspending is dangerous, financially sound families may have difficulty switching from saving mode to spending mode. Even well-prepared families can feel uncomfortable spending their savings despite years of planning.
How to stay on track
You don’t want to spend too much or too little in retirement. Although your first year of retirement may look different than the next, it can be a good time to take stock to adjust your financial plans.
Tracking your monthly spending and categorizing each purchase as recurring, temporary or one-off will give you a better picture of your general expenses. You can also establish a “retirement” budget for the first 12-18 months that accounts for additional spending, and then tighten it after that. You can then revisit the withdrawal rates after the initial amount has stabilized. Remember, you should adjust any strategy to fit your specific goals and financial situation.
Revisit your budget and monitor your spending to understand how much you’re spending versus what you’ve saved. Remember that you’re not just looking to see if you spent a lot of money; and you want to get the feeling that you are limiting yourself.
Planning ahead helps. Before you retire, take stock of all your finances and make a plan for how much you can spend. That way, you won’t get caught up in feelings of relief from your job, and you can create a strategic plan that takes into account your income, budget, taxes and dream retirement.
