Create a Realistic Spending Plan for Retirement

To live the retirement you want, you need to keep an eye on expenses and spending, so your hard-earned money will last as long as you do.

by NEA Member Benefits

Key takeaways

  • Unless you decide to go back to work, your retirement income is basically fixed.
  • Spending is the one aspect of your budget you have the most control over, and there are a few ways to lower expenses in retirement.
  • Retirement may last 20-30 years or more, so you need to protect your fixed income.

Now that you’re retired, it’s time to revisit your household budget to make sure it aligns with the different realities of retirement versus employment. Review this article for some tips on basic budgeting.

Know your income

The primary difference you face in retirement is income. Unless you plan on earning money in retirement, income from your state pension, annuities, Social Security (if applicable) and personal savings is basically fixed. It’s probably not going up from here and, depending on investment returns, it could go down, or at least the amount you have to withdraw from savings might vary.

Pin down your income from all sources. Don’t forget money in any stray IRAs or 403(b) plans from previous employers. If you qualify for Social Security, use this Retirement Estimator on the Social Security website to estimate your benefits. If you receive state pension benefits and are also eligible for Social Security, your Social Security benefits may be reduced based on the Windfall Elimination Provision (WEP). (Your state pension benefits are not affected.) This calculator takes the WEP into consideration when estimating Social Security benefits. Social Security benefits for educators can have a lot of moving parts. The online estimators above may not give you accurate numbers for your unique situation. Consider visiting your local Social Security office to discuss your benefits one-on-one with a representative.

Spend wisely

The one variable in your budget that you have the most control over is how much you spend. Depending on your lifestyle choices, your retirement spending could be way less than it was when you were working, or about the same or possibly more. So make a note of your expenses and categorize them as either necessary or discretionary. Necessary expenses include housing, food, insurance, taxes and medical costs, among others. Discretionary expenses cover everything else, including eating out, premium cable channels, travel and entertainment.

Keep in mind that inflation will continually erode your purchasing power each year, making it even more important to watch expenses so you can limit savings withdrawals. You must factor the inflation rate into your investment returns to get your “real” return, as it relates to how much your money will buy. If inflation is running at 3% and your investment return is 5%, your “real” return (the actual value of your money earned) is just 2%.

Here are a few tips for lowering expenses in retirement:

  • Review your disability and life insurance. If you no longer have people who depend on you for support, you may not need life insurance. If you aren’t working, you may not need disability insurance, or you may be able to reduce your coverage, particularly if you are over age 65 and are covered by Medicare. Insurance coverage provides peace of mind for many people, so discuss your individual needs with your insurance agent.
  • Downsize your living arrangement. If you still have a big house, consider selling it and moving into something more modest. Research the cost of living in different parts of the country and consider moving to a state on the lower end of the scale or one with lower taxes and medical costs.
  • Pay down debts. When you’re living on a fixed income, interest payments on debts can take a big bite from your resources. Focus on paying down higher interest debt first, like credit cards, and aim to clear the balance sheet of all debt as soon as possible.
  • Be prudent with family financial assistance. Elderly parents and adult children might come to you for financial help. Make sure you don’t overextend yourself by being too generous. Remember, you’re on a fixed income now and don’t have the earning power or time to make up for large gifts or loans.
  • Live within your means. You might spend 20-30 years in retirement and you want your fixed income to last. As you age, it’s safe to assume medical costs may go up. If you don’t have long-term care insurance, you’ll want a big enough nest egg to cover potential care expenses later in life so you don’t burden your family with those costs.

The bottom line

You can live the retirement lifestyle of your dreams if you’re reasonable and careful with your resources. Even though you may have already taken many of the steps outlined above, you should continue to be diligent with your budget, determine what you can and cannot afford, and stick to your spending plan. It’s an ongoing process. This will give you the best opportunity to feel financially secure throughout retirement. If you want the help of a financial advisor, see this article for some tips on finding the right one.