How Much Will You Spend In Retirement?- Kara Jones

A few years ago, a series of advertisements from an investment firm portrayed individuals living it up with luxury products like expensive watches. They reminded the audience that they did the same thing as cheap watches: tell time.

“How are you spending your retirement?” asked the tagline. That is, unnecessary spending today equals less security tomorrow, and it’s wiser to invest instead (specifically through them).

Projecting your retirement spending is an essential component of retirement planning since it’s crucial to the question of when you’ll be financially ready to retire, as well as the linked concerns of income projection.

The most reliable retirement income for a federal retiree comes from annuities under CSRS or FERS and Social Security and other alternative sources such as military retired pay or a spouse’s pension from private sector work. Income from retirement savings plans such as the Thrift Savings Plan (TSP) is also included. In all circumstances, the nearer you are to retirement, the more accurate your income projection will be.

Regarding spending, conventional wisdom suggests that you’ll need around 70-80% of your pre-retirement income to keep your standard of living in retirement, assuming that some expenses will decrease.

Those “retirement confidence” studies are all about achieving a goal ratio of projected income to expected outgo.

Just keep in mind that this isn’t an exact science. According to a recent survey by the Employee Benefit Research Institute, “Savings regret — or sticker shock — among retirees is widespread: People wish they’d saved more when they confront future retirement expenses that they hadn’t fully considered prior, like long-term care.”

It stated that this helps explain why many people in all retirement income levels, including the most affluent, are hesitant to tap their savings more than they had planned to cover for unexpected expenses.

In general, retirees don’t want to spend down their own assets. Usually, this decision to keep the nest fund throughout retirement had to do with the uncertainty surrounding life and spending needs in retirement.

One study respondent cited her in-laws, “who have enough retirement funds to live comfortably yet would rather eat ramen noodles than squander their assets.”

Similarly, the Center for Retirement Research cites retiree research on why some retirees barely draw down their financial holdings throughout retirement. In reality, data suggests that many retirees’ assets keep growing long after they leave the workforce. This delayed (or negative) drawdown is perplexing, given that one of the primary goals of retirement savings in the lifecycle model is to supply consumption in old age.

One possible cause, according to the report, is knowing about potential costs, like long-term care. Others include the linked concern of “longevity risk” living far longer than predicted, increasing the likelihood of long-term care costs — and a desire to leave money to successors.

TSP investors’ conduct reflects this desire to protect savings. The major business stock C fund accounts for about 31% of total assets (excluding its portion of investments in the mixed lifecycle L funds). The ultra-safe government securities G fund has around 27%, not including L fund money invested in that fund.

However, for individuals aged 60 to 69 — late-career employees and early retirement period retirees — the figures are 38% G and 28% C. For retirees in their 70s and older (practically all retirees), they’re 43 and 28.

Is this an “issue?” No, not always. People are free to make decisions based on their best judgment.

However, the statistics imply that, because prospective long-term care expenses are among the top retirement spending concerns, more people may consider insuring against those expenses. They also emphasize the necessity of recognizing the worth of income streams that are guaranteed for life, such as Social Security and civil service annuities, which operate as a floor beneath which income will not fall.

Confidence in how you’ll spend your retirement funds is about more than simply money in and money out  it’s also about peace of mind.

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How Much Will You Spend In Retirement?- Kara Jones

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