Kiplinger\'s Personal Finance 02.2020

46 KIPLINGER’S PERSONAL FINANCE^ 02/2020

SOURCE: FIDELITY

RETIREMENT

ums, retirement savings, and state and

local taxes. The more specific you can

be, the better. Ian Rea, a certified finan-

cial planner in Medfield, Mass., asks

clients who are preretirees to fill out a

50-line spreadsheet that covers every-

thing from life insurance premiums to

pet care. Use a software program,

spreadsheet or worksheet such as the

one on page 51 to list your expenses.

2. Back out expenses that
   will decline or disappear
   Once you retire, you’ll no longer con-
   tribute to a 401(k) or other workplace
   retirement plan, so that expense will
   go away. If you contribute to a health
   savings account through your job, that
   expense will go away, too—once you
   sign up for Medicare, you can no longer
   contribute to an HSA (but you can use
   the money in your account to pay for
   unreimbursed health care costs).
   If you plan to pay off your mortgage,
   that’s a large line item you can remove
   from your budget (although you’ll still
   need to plan for property taxes, home-
   owners insurance and maintenance).
   You can remove health insurance pre-
   miums deducted from your paycheck,
   but be prepared to add back costs for
   health care, even if you’re eligible for
   Medicare (see step 4).
   Some preretirees still have adult
   children “on the payroll”—that is,
   they’re providing financial support,
   either directly or indirectly (the kids
   still live at home, for example). That
   can complicate your estimates of how
   much you’ll spend in retirement, es-
   pecially if you plan to cut them loose
   after you stop working, says Sean
   Curley, a CFP in Greenwood Village,
   Colo. Likewise, if you gave a child
   money for a down payment on a home,
   that’s an expense you can remove from
   your spending checklist.


3. Figure out the cost
   of your retirement lifestyle
   Give some serious thought to how
   you’ll spend your time—and money—

they would take a trip around the

world,” says Alicia Munnell, director

of the Center for Retirement Research

at Boston College. Instead, many are

“paralyzed and don’t feel comfortable

taking money out of their accounts,”

she says.

Here’s how to break out of this iner-

tia. You may find that you can afford

to book that dream cruise after all.

1. Figure out how much
   you’re spending now
   You may have a vague idea of how
   much you’re spending based on how
   much is left over from your paycheck
   every month. But do you really know
   how much of your paycheck goes to-
   ward groceries, gas, movies and all
   of life’s other necessities and non-
   necessities? Now is the time to get
   a handle on the cost of your lifestyle.
   Comb through your credit card and
   bank statements and track all of your
   expenses for the past three to six
   months. Don’t overlook expenses that
   occur quarterly or biannually, such
   as property taxes. You can enlist tools
   such as Mint.com to get a breakdown
   of spending categories; some credit
   and debit card providers will also cate-
   gorize your expenses for you. Review
   your pay stubs to plug in the amount
   you pay for health insurance premi-

retirement. When you retire matters,

too: If you retire before age 65, for

example, you’ll need to figure out how

to pay for health care before you’re

eligible for Medicare.

To come up with your own magic

number, you need to figure out how

much you’ll actually spend in retire-

ment, which means coming up with

a comprehensive retirement budget.

Only then can you determine whether

your savings and other sources of in-

come are sufficient to finance the life-

style you’ve envisioned.

You’ll also need to estimate how

long your money will need to last. You

may have heard of the 4% rule, which

is considered a safe withdrawal rate

for a 30-year retirement that might

include a bear market and periods of

high inf lation. Under this rule, you

withdraw 4% from a diversified port-

folio in the first year of retirement

and adjust the amount annually by

the previous year’s rate of inf lation.

For example, with a $1 million portfo-

lio, your first year’s withdrawal would

be $40,000 (see “Harvest the Fruits of

Your Savings,” Oct.).

But this strategy won’t help you

much if a 4% withdrawal rate won’t

cover your living expenses. Once

you’ve worked out your retirement

budget, you can determine whether a

4% withdrawal rate—combined with

other sources of income, such as Social

Security and a pension, if you have

one—will be sufficient to pay the

bills. If not, you may need to save

more, work a few more years, or both.

That’s a sobering thought, but this

exercise can also be liberating. You

may determine that a 4% withdrawal

rate will provide more than enough

money for a comfortable retirement,

with some left over for your heirs.

Several studies have shown that many

retirees are so worried about running

out of money that they’re unwilling

to spend their savings, even if they’ve

accumulated a substantial nest egg.

“When we all started talking about

what people would do with their 401(k)

balances, the initial thought was that

Staying Home

After the Go-Go Years

Retirees typically spend less as they age.

Average household spending is based on

data from the Bureau of Labor Statistics:

Age

55-64

Age

65-74

Age

75+

$58,709 $46,295 $36,717