How to Create a Retirement Spending Plan

Before we get into creating a Retirement Spending Plan and share a link to the 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 in the following 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.  This side-by-side comparison allows you to logically compare your actual to forecasted expenses for reasonableness.

Ensure all expenses are included

In the excitement to forecast all of the expenditures you will make to support your exciting new retirement lifestyle, did you forget to include the boring yet actual expenses you will also incur?  Your house may be paid off, 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?

Align spending with goals

Both 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 should 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

Something is better than nothing when it comes to creating a Retirement Spending Plan.  I would recommend the plan be kept in a digital format so it can easily be retrieved and edited.  A spreadsheet program naturally lends itself well to this exercise.  A copy of Thrive Retirement Specialists’ Retirement Spending Plan spreadsheet we posted to Google Sheets can be viewed, downloaded, and edited here: ThriveRetire - Retirement Spending Plan.xlsx - Google Drive.

We break down expenses into three broad categories: 1) Essential, 2) Discretionary, and 3). Legacy (we account for contingent expenses elsewhere in our planning process).  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 I would agree to a certain point, but I can tell you that I could not ever completely cut that out of my budget.  I could reduce it but not eliminate it.  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.  

There is no right or wrong way to determine your Retirement Spending Plan.  What is important is that it be:

1. Documented
2. Reflect your desired vision for retirement
3. Be reasonable
4. Be inclusive of all expenses    

It is the resulting forecasted expenditures from this exercise that feeds into the planning process later.  First, when looking at how best to connect your available assets to meet these expenses.   Second, when trying to arrive at your sustainable spending plan after testing to see if plan assets can fund all spending within a “suitable” probability of success, over your chosen planning horizon, and without exceeding your risk profile.  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.

If you are ready to start planning for retirement, we stand by ready to help.  Contact us here at any time.

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ABOUT THRIVE RETIREMENT SPECIALISTS

Thrive Retirement Specialists is a retirement planning specialist dedicated to delivering a more thoughtful and strategic approach to retirement planning for those nearing or in retirement. We are a fee-only Registered Investment Advisor (RIA) offering a single, flat-fee service entitled ThriveRetire^TM that goes far beyond what has traditionally been known as retirement planning.  ThriveRetire™ is an engaging ongoing 8-step retirement planning process and investment management service that seeks to identify all risks, assets, tools, and tactics to develop an optimal retirement plan designed to support your ideal retirement lifestyle and goals to the fullest extent possible.  With every interaction, we seek to inform and serve, so our clients can safely trust their ThriveRetire™ plan and process, leaving each client with the confidence and peace of mind to live a vibrant and full life through retirement.

ABOUT ANTHONY WATSON, CFA, CFP®

Prior to founding Thrive Retirement Specialists, Tony spent eight years serving as the Chief Investment Officer of a firm where he provided advice and investment management services to over 600 individuals representing at the time over $1.5 billion of investments. Before this, Tony served as Vice President at J.P. Morgan Private Bank, where he advised high- and ultra-high net worth individuals on all matters of wealth, including investments, portfolio construction, portfolio management, and retirement planning.

Tony lives in Dearborn, Michigan, with his wife Dawn and daughters Emma and Anna.