Considerations for Adjusting Retirement Spending
When the stock markets experience major fluctuations or the economy turns to recession, it is common to have the thought, “Will it be ok?”. Over the last few months, I have had many conversations about how plans have been changed. Whether it is a major vacation that has been cancelled, or decisions were made to spend more cautiously until there is some stability, these last few months have been a good example that things don’t always go as planned. For those in retirement, it is always helpful to be prepared for scenarios that can affect an income strategy. I suggest having an action plan in place to make financial adjustments when necessary. Here are some considerations for how to approach uncertainty in retirement.
You need a paycheck
One major adjustment in retirement is determining where the monthly income is coming from. Throughout our careers, the stability of knowing when money will show up in the bank allows us to build a lifestyle. In retirement, the first task is to replace that paycheck that has been showing up over so many years. In order to have an effective retirement plan, we need to first determine how much guaranteed money will be coming in each month. For most people, guaranteed money will be Social Security. For others, there may be a pension that supplements or replaces Social Security.
After considering pensions, we look to other consistent income sources. Real estate rental income, business ownership, annuities, etc. These consistent paychecks should give us a baseline for how much secure income can be expected each month.
Know your essentials
Our next step is to really know the cost of essential expenses that you need to pay for each month. Typically, when we refer to essential expenses, they are the same for everyone: housing, food, utilities, transportation, insurance, and medical costs. If these essential costs can be covered by the paycheck we just calculated, then there can be peace of mind that your needs are taken care of. If there is a shortfall, then we need to consider ways to generate more stable income.
You probably need a playcheck
Beyond covering your essential expenses, we need to look to paying for your lifestyle. If you are familiar with Maslow’s hierarchy of needs (see the image below), you will know that the essentials are the foundation. However, we also need fulfillment beyond just security. In order to pay for your lifestyle spending, we often look to your investment portfolio to generate income that you can withdraw as needed.
Be prepared to make adjustments
The reason it is so important to define your essential expenses and your lifestyle expenses is that you will need to be able to adjust spending decisions if things don’t go as planned.
Start with your lifestyle expenses and prioritize what changes can be made first. If your investment portfolio is down in value because of the stock markets, it is usually smart to leave your money invested and let your value come back. This means you may want to delay a withdrawal from your portfolio that you would normally take. In retirement, these large withdrawals are typically tied to the top of Maslow’s pyramid. Covering a self-actualization, esteem or belonging need. Can this spending be put off?
After evaluating what lifestyle expenses can be adjusted or delayed, the next step is to evaluate essential expenses. Often expenses that we deem essential are not exactly essential. We usually place a value on essentials based on what we currently spend. However, if we really look at our housing costs, the food that we buy, etc. there may be a lower cost if we made changes. An example would be downsizing to a home with a lower mortgage or property tax payment.
I was once told that it helps to make decisions before you must make them. I think that advice is helpful when it comes to retirement planning. If we carefully consider what to adjust before there is a need to make changes, then the process isn’t alarming, and it becomes just part of the plan. Most of the time, adjustments are temporary. The stock markets roar back to new highs and the economy cycles back to growth. Making it through the downturns just depends on being prepared.