How to Create a Retirement Spending Plan
Key Takeaways:
- A Retirement Spending Plan translates your retirement goals into dollars, ensuring both essential and discretionary expenses are accounted for so you don’t underestimate future costs.
- Creating and maintaining a spending plan helps you align expenses with your priorities, compare tradeoffs, and adjust when market conditions or life circumstances change.
- Using a digital budgeting tool like a retirement budget spreadsheet and categorizing expenses provides clarity and flexibility, making it easier to update and stay on track throughout retirement.
Have you ever wondered if you're truly ready for retirement, or if you're just hoping your savings will somehow stretch far enough? Most people approach retirement with a vague idea of their expenses, crossing their fingers that everything will work out. But as retirement planning specialists, we often see that without a solid retirement budget or spending plan in place, people often get blindsided when it’s already too late.
Here, you'll learn how to create a Retirement Spending Plan that accounts for every expense category, helps you make informed decisions about your retirement income planning, and gives you the confidence to enjoy your golden years without constantly worrying about money.
Before we get into creating a Retirement Spending Plan and share a link to a free retirement budget spreadsheet we use for this exercise, let’s first explore what a Retirement Spending Plan is and why you need one.
What Is a Retirement Spending Plan?
At its most basic level, a Retirement Spending Plan estimates how you will spend money in retirement. A Retirement Spending Plan is a tool you use to translate your goals and ideal vision for retirement into dollars. This tool is used early in the retirement planning process, and it continues to be used and reflected upon throughout retirement.
A Retirement Spending Plan helps to ensure you have accounted for all retirement spending needs as accurately as possible. The level of granularity one should include is based upon a combination of personal preference and level of confidence one has their financial resources can meet the forecasted level of bottom-line needs over time.
Why Do I Need a Retirement Spending Plan?
A Retirement Spending Plan serves many purposes while planning for retirement and while in retirement. A Retirement Spending Plan lays out existing expenditures next to forecasted expenditures to help you in the following four ways:
Assure the reasonableness of your forecast
Retirement means different things to different people depending upon their unique objectives and vision for retirement. Whether costs are expected to be higher, the same, or lower, the need to sanity check the forecasted expenses is imperative. If you plan to travel more in retirement, you would expect the projected vacation’s expense category to increase over the actual expense. Likewise, if you are vacationing more, you are probably eating out more as well. Creating a Retirement Spending Plan gives you a side-by-side comparison that allows you to logically compare your actual to forecasted expenses for reasonableness so you can make adjustments as needed.
Ensure all expenses are included
As retirement planning specialists, we often see people thinking of the expenses associated with the fun new things they can do once they retire, but forgetting the boring (yet often important) expenses they’re also likely to incur through retirement. For example, maybe your house will be paid off by the time you retire, but you will still incur maintenance expenses to replace appliances, the furnace, windows, and maybe the roof. How about the fact you will need to replace that car you paid off one day as well? As you age, will you need to hire help to handle household maintenance like cleaning the gutters and mowing the lawn?
Creating a Retirement Spending Plan helps you map out both the fun and the not-so-fun expenses so you can ensure that you have the means to cover both without running out of money.
Align spending with goals
When planning for retirement and throughout retirement, a Retirement Spending Plan helps you see whether you are spending money according to your goals and ideal vision for retirement. If you are not, you will be able to see how to reprioritize your spending so that you are doing so. A Retirement Spending Plan will show you where the money is going and help keep you aligned, so you do not veer off course of your desired goals and objectives.
Compare tradeoffs
A Retirement Spending Plan ensures you are in a good position to evaluate tradeoff decisions both as you plan for retirement and while in retirement, especially if adjustments need to be made due to an unfortunate path of market returns or overspending. If you need to trim forecasted expenses to maintain the retirement plan’s viability, you will be able to see where best to do so.
How to Create a Retirement Spending Plan
So how do you get started with creating a Retirement Spending Plan?
The most effective approach uses a digital format that you can easily update and modify as your circumstances change. To help you get started, we’ve put together a sample retirement budget spreadsheet that you can download here: Retirement Spending Plan.
Start by gathering 12 months of your current spending data. Credit card statements, bank records, and any existing budgeting apps will provide the foundation for understanding your current expense patterns. Don't worry about perfection at this stage – something is better than nothing, and you can refine your numbers over time.
Our sample retirement budget spreadsheet breaks down expenses into three broad categories:
Essential
Discretionary
Legacy
Everyone will have a different view of what is essential versus discretionary, so we leave room for customization. We also take into account that some expenses can be considered both essential and discretionary. An example of this is eating out at restaurants. Most people think eating out is discretionary, and we would agree to a certain point, but even as retirement planning specialists, we can honestly say that we would probably be unlikely to find someone who could ever completely cut that out of their budget. Additionally, we offer varying levels of category granularity so a user can be as detailed or as high level as they desire.
Across the top, we use the column headings "Current Annual", "Annual At Retirement", and “At Age.” The "Current Annual" column is where you can list your current expenses. The "Annual At Retirement" column is there for those planning for retirement and provides space for projected retirement expenses. The “At Age” columns allow space to segregate retirement into phases. For example, some people like to think of retirement as the “go-go years,” “slow-go years,” and “no-go years,” where each phase brings with it a different set of expense assumptions.
Monitoring and Adjusting Your Retirement Spending Plan
There is no right or wrong way to determine your Retirement Spending Plan. What is important is that it be:
- Documented
- Reflect your desired vision for retirement
- Be reasonable
- Be inclusive of all expenses
It is the resulting forecasted expenditures from this exercise that feeds into the planning process later. Refer to our Insight entitled "Steps That Should Occur in a Proper Retirement Planning Process" to learn more about the steps in our retirement planning process.
Also don’t forget that creating a Retirement Spending Plan is a living document that will require regular monitoring and adjustments to ensure it’s always aligned with your goals and life changes that may require budget updates. Many retirees find that their initial projections were reasonably accurate for essential expenses but required significant adjustments in discretionary categories. Health issues might increase medical expenses while reducing travel costs, family circumstances might shift your gifting priorities, and market performance might influence your discretionary spending comfort level.
If you are ready to start planning for your ideal retirement, we invite you to lean on the help of our retirement planning specialists. Get started with a complimentary Thrive Assessment by scheduling a call with us here.