In a post last summer, I discussed a column from the San Francisco Chronicle that listed their personal finance columnist’s nominees for the “Eight Toughest Retirement Decisions.” One of the eight is “How to Budget.”
In principle, it isn’t all that hard, and not all that different from managing your expenses before you retire. You just have to know what you can afford to spend, figure out whether what you actually do spend fits within that amount, and if not, find ways to cut down your expenses.
The main reason this is tricky is that first number: what you can afford to spend.
When you’re working, that number is pretty obvious for most people. It’s what the working members of the family bring home in their paychecks, minus whatever they can, or feel they must or want to, set aside in savings.
In retirement, it’s not so obvious, because instead of saving money, you may be dipping into your savings.
Of course, a lot of retired people are not comfortable dipping into their savings, and wisely so (at least to some degree). The more you dip in, the less you can expect in future interest or investment earnings. And the less you have available if you need money later, say for assisted living or nursing home care. And the greater likelihood, especially if you continue to dip in and you remain pretty healthy, that eventually there will be nothing left.
So budgeting for retirement means not only knowing what your current sources of income are, but what also what they are likely to be in the future, what your probable or possible future needs will be, and what other resources you have (or might be able to tap into) to meet those future needs. And, oh yeah, how long you’re going to live.
The typical retiree, in my opinion, is actually smarter about all this than the typical financial advisor. We regular folks know that we don’t know how long we’re going to survive, but if we can just live off of our Social Security, any pensions we might have, and the interest on our savings, then we can go on indefinitely.
Sure, inflation will take a bite, but not necessarily a real big one. Social Security is inflation-indexed, and so are some pensions. Just as important, if we do live a long time, is that most of us, once we get into our 80s, are slowing down a lot, and if we live into our 90s or beyond, we’re not spending much money any more, other than on the basics. So our cost of living (assuming we are not in a care facility) tends to level off and sometimes even decrease if we live to be truly elderly.
So financial advisors who talk about inflation like it’s a lifelong worry – which means almost all of them – do not grasp the situation properly.
But regular folks have an instinct that if they live conservatively, save and invest conservatively, and live on what they can afford without dipping into their savings, they will probably be all right. And for most people, that works out.
”Savings,” by the way, includes the value of your house, which for a lot of people could pay for several years of long-term care, if they need it – and though most people do not need that much care in old age, and many don’t need any at all, some do, so it’s well to have some assets in reserve somewhere.
These are just general observations, though. And your situation could easily be much more or much less precarious, depending on your health, your family structure (and your family’s health and finances), the amount of your savings, the amount of debt you have, your lifestyle, and any number of other factors.
It would be a shame if you ended up in a bad way because you followed the norm, when that wasn’t the right answer for you. It would also be a shame if you budgeted way too conservatively, and therefore lived an unnecessarily constricted retirement, because you didn’t realize what you had going for you, or how it could best be applied.
So I don’t mean to say you shouldn’t talk to a financial advisor. But don’t let anyone talk you into anything you don’t fully understand or aren’t completely comfortable with.
It’s your life, and for most of us as we age, our options dwindle while our uncertainties and risks remain steady, or even worsen. So caution is important. But so is awareness, knowledge, and discipline.
With or without outside help, you should make sure you do look at that retirement budget, and review it from time to time. It’s pretty easy if you are conservative about it. If you think you might be able to go beyond that, getting some help, or at least a second opinion, is probably a smart choice..
Chuck Yanikoski is a part-time retirement adviser who lives and works in Harvard. For more about him, or to contact him directly, visit www.ChuckYRetirement.com.