Skip to main content

Forgotten expenses: One fictitious couple’s quandary.

The situation seems to unfold the same way: Ron and Rhonda Retiree have what they feel is more than enough money for retirement. Using some high school math, they calculate a monthly expense number to identify the amount they want, around 5% of their portfolio, is sufficient for their needs. No need for detailed planning… .they’ve got this.

But then it starts — the extra withdrawals. They forgot to include weekend jaunts or the maintenance on the boat, or annual golf outings. They didn’t consider them a regular expense during the cash-flow analysis. Maybe the kitchen needs to be redone, or they need to buy a new car or give the kids money for a down payment on a house. All legitimate uses for their money — if they have enough, and if they planned for it.

Ron and Rhonda see their balance and assume they can dip into it anytime they want, with little impact on the long-term cash flow. They don’t see that the continuous withdrawals are creating a scenario of trying to get the same cash flow out of a much smaller portfolio. When the additional expense is added into the calculation, their cash flow needs become a much larger percentage of their portfolio. It poses a significant challenge in making their savings last. The result: A cash flow needs to be estimated at 5% annually turns into a 7%, 10%, even 15%. Spending 5% a year was doable. But 15% is not realistic.

Be extra generous with your expense estimates.

Well before retirement, you should realistically calculate retirement expenses. When we sit down with folks, we factor in inflation, ask about significant fees they are planning and dig deep to determine how they will spend their money. Gifts, trips, parties. It all costs money. Then we estimate high. Always estimate expenses high.

Then we look at their sources of income. Pensions, Social Security, retirement accounts, investment portfolios, savings, businesses, part-time jobs — everything. Again, we apply inflation and project their income forward. If you estimate expenses high and income low, you can often mitigate against some unpleasant surprises. Always estimate income low. History shows us that costs will usually decline in the later years of retirement. There are fewer trips; you sell the summer house and generally spend less. But your expectations have to be realistic.

I’ve been in the business for a long time, and I’ve seen it all over the years. If you want to make your money last in retirement, being honest with yourself, early and often, is the best strategy to ensure retirement success. Along with honest numbers, it’s important to create a guaranteed income bucket and a growth bucket with downside protection and provisions for health care and taxes. Retirement planning doesn’t start when you are 65. It begins years, even decades, before you retire. And it begins with you being upfront with yourself and your financial planner and having realistic expectations.

If you haven’t done so, consider sitting down with Heritage Financial Planning. Our STAR process walks you through every step those nearing retirement or already in retirement need to consider and prepare to safeguard their financial future and make sure they have the peace of mind they have worked so hard to secure.


Click here to learn more about our HFP STAR Strategy process.

You’ve worked so hard to get you where you are today, and with all the changes taking place in our world these days, let your next step be your best step in preparing for the rest of your financial life. Get your custom-designed S.T.A.R. Strategy Plan now!  Give us a call at our office at (574) 606-4406.




Copyright © 2017 The Kiplinger Washington Editors. All rights reserved. Distributed by Financial Media Exchange.

Call Now Button