Nothing is more important than managing your spending in retirement. Image: J.J. Gouin/Shutterstock.com
By: John GrobeThere are many “rules” for saving for retirement, some of which are very general and involve discipline and frugality. Rules such as:
• Live on less than you earn.
• Increase the amount of money you set aside for retirement (and other goals too) each year.
• Avoid bad debt and minimize good debt.
• Use tax advantaged retirement accounts such as the Thrift Savings Plan and Individual Retirement Arrangements.
• Invest for long-term gain.
There are also specific rules that help with your long-term planning, the biggest of which is to set a goal of having 80% of your pre-retirement income to live on in retirement. As federal employees and uniformed service members, we receive a portion of this through our pension/annuity and Social Security.
What about rules that apply to spending money during retirement?
One of the most common rules is the “4% rule”. This rule posits that you can safely withdraw 4% a year from your retirement savings, take annual inflation adjustments, and almost certainly end up not running out of money during your retirement. Of course, we will never run out of money from our pension/annuity and Social Security.
But, once we retire and start drawing down savings, we need to consider our own financial situation.
There and many wild cards that affect our withdrawal strategy. Things like:
• Our current and expected health.
• Our best guess as to our life expectancy.
• If we’re married: Our spouse’s current and expected health; Our best guess as to our spouse’s life expectancy.
• Whether or not you enter retirement with any debt.
• Whether or not you have any familial financial obligations to children or parents.
• Whether you can, or want to, work part-time.
• Our retirement plans and goals, such as travel and other items that are on our “bucket list”.
There are, of course, more wild cards than those listed above, and each one of them can cause you to adjust your retirement withdrawals. You’ll have to pay more attention to spending your retirement savings down than you did to building them up during your working career.
Nothing is more important than managing your spending in retirement. You’ll need a budget, just like you needed one before retirement. And the best time to develop a retirement budget is while you are still working.
Start by estimating your retirement income. That should be easy if you refer to your Social Security statement and any pension/annuity estimates you have received from human resources. You can use the 4% rule to estimate what you might receive from the TSP and IRAs. Then estimate your expenses. There are some that will go down (e.g., commuting, office attire, etc.) and some that will go up (e.g., travel, greens fees, etc.). If the numbers do not match, make necessary adjustments so that they will.
Adequate planning can make the financial transition to retirement easier than you think.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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