The 50+ Budget Playbook: 7 Steps to Nail Your Retirement Spending

 Welcome to "The Retirement Guide" Podcast! I'm your host George Jameson, owner of Capital Wealth Group, a Fee Only Advisory firm. Whether you’re nearing retirement or already retired, Join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

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Transcript

George Jameson: 0:18

Hi. I am George Jameson, certified financial planner and founder of Capital Wealth Group, located in Columbia, South Carolina. Today, we're diving into a question I hear all the time. How do you know how much you're gonna spend in retirement each year before you actually retire, if you underestimate your spending, you can put the safety of your retirement plan at risk. However, if you overestimate, you might be working longer than you actually need to be. In this episode, I'm going to walk you through seven simple steps to help you accurately predict your retirement spending so you can retire with confidence. So step one, find your baseline. Before you plan for retirement spending, you need to understand what you spend today. Ideally you have a detailed budget where every transaction is categorized from groceries, utility bills, and entertainment. You name it. If you already do this, fantastic. However, for most of us, we probably don't keep that detailed of a budget. So if this is not you, grab your bank and credit card statements for the past 12 to 36 months total up all outflows. Just be careful not to double count your credit card payments when they hit your checking account. This gives you a solid baseline of your current lifestyle's cost. Think of this as your starting line in your retirement budget. So step two, subtract out retirement savings and any other expenses you'll not have in retirement. You want to remove the money you're currently saving those 401k contributions. Roth IRA deposits, taxable brokerage account investments. None of these will continue once you retire. So if you saved$20,000 in retirement account last year, deduct that from your baseline. You also may have other expenses that you'll not have in retirement. For instance, if your house will be paid off, you won't have a mortgage payment. Maybe you still have dependents at the house or kids in college. You may not have those expenses in retirement. So subtract those as well. Now you have a clear view of what you actually need to live on once you stop working. Now, step three, estimate healthcare costs. Healthcare is one of the biggest unknowns for retirees. So let's break it down. If you're already 65 or older, you'll obviously enroll in Medicare. Part A is typically premium free, but parts B and D carry annual cost, roughly 2200 per person for part B, and about 666 for Part D. Today. If you're married, that's about$5,775 a year for just the premiums alone. Then you add a Medigap policy premium to cover deductibles and co-insurance. Depending on your plan that could be anywhere from 1500 to 4,000 per person annually. If you're retiring before 65. You'll need to estimate your Affordable Care Act marketplace Premium instead until you hit age 65. I did a whole podcast last week on the ACA and the changes that are going forward starting in 2025 so please check it out. You can also visit healthcare.gov and enter in your details and choose a middle of the road silver plan as a benchmark. Then add those projected premiums to your baseline budget. So step four, define your discretionary fun budget. Discretionary spending is what makes retirement enjoyable. Travel, dining out, hobbies, charitable giving, but your baseline likely already includes some of these. That's why it helps to categorize your budget. Which expenses do you consider essential and which are discretionary? Remember, essential here is very subjective. Internet might be non-essential in theory. But if you love streaming movies, it's essential for you. Once you've tagged current expenses as either essential or discretionary, sit down with your partner and think about how these categories will change. Maybe you've only taken one annual trip, but want to double that in retirement or perhaps you love culinary experiences. Identify the money dials, the things you derive the most joy from, and decide where to dial it up or dial back the spending. And then step five, create three spending levels rather than one single spending target. Think in terms of three. First you have your minimum target. Your bare bones, essential spending. This is the level you need to cover necessities such as housing, food, basic healthcare and so on. And then number two would be what I call goal target. Your ideal realistic budget based on the discretionary spending you identified, this is the number you've been building toward. Then number three I like to call, dream, target, and upper limit budget, representing the most you'd want to spend. Even if you could spend more, there's usually a point of diminishing returns. Spending beyond this wouldn't meaningfully increase your happiness. Having these three targets helps you see how close you are to your dream lifestyle, and whether you should work a few more years for that extra cushion, or if you're already safe to retire now, Step six, factor in taxes. Now let's consider taxes before and after Social security. You'll need a tool or software that can model tax liability on withdrawals I use a financial planning software called Right Capital, that includes tax planning. Also use another one called Holistic Plan that goes into more detail. If you're doing this yourself, there are a couple good ones online as well. This is where distribution or withdrawal tax strategies comes into play Should you take money from your pre-tax account, your taxable account, or your tax free account? When and in what order? This is very important, and using some type of financial planning software that incorporates taxes will help you decide where to start taking distributions from, and how it'll affect your taxes over time. You will want to run this through your tax tool to estimate your annual tax liability each year in retirement. Add that to your pre-tax spending targets to get an accurate view of how much gross income you'll need. So let's move on to step seven. Step seven, project income into the future. Finally, retirement spending doesn't always stay flat while inflation does push cost up. Research shows that retirees real spending is more like what we call the retirement spending smile. Most people tend to spend more in the early years of retirement, less during the middle phase, and then more again later in retirement due to health related expenses. Projecting your spending like this can give you a more nuanced, realistic picture of your financial needs over a 30 year retirement horizon. But everyone's retirement journey is unique. Take my parents for example, they're 76 and 79, and they're spending as much or more on travel now than they ever did before. My mom just returned from a two week mission trip to Uganda. Then they joined my family for a mountain getaway. And spend a week at the beach, and now they're on the way to Mexico for another week long mission trip. So let's now wrap it up. So there you have it. Seven steps to craft a personalized retirement spending plan that goes well beyond the generic 80% rule of thumb. So let's recap First, find your baseline. Think of this as your starting line in your retirement planning budget. Step two, subtract out retirement savings or any other expenses you'll not have in retirement. Step three, estimate healthcare costs. Step four. To find your discretionary fun budget, the discretionary spending that makes retirement enjoyable. And then step five, create three. Spending levels, having these three targets helps you see how close you are to your dream lifestyle and whether you should work a few more years for that extra cushion, or if it's already safe for you to retire now. And then step six, factor in taxes and step seven project income into the future. If you follow these steps, you'll have a detailed, realistic estimate of what you need each year in retirement, and it'll give you a peace of mind. Knowing your plan is built on solid data, not just a rule of thumb. If you found this episode helpful, please share it with a friend, leave a comment or reach out to me directly. I'm George Jameson of Capital Wealth Group, and remember, you may not need more money, you may just need a better plan. Thanks for listening and I'll catch you in the next episode. Have a great day.