Reality Check

Once you’ve made some decisions about your retirement lifestyle, it’s time to get serious about how you are going to get there. To do so, you need a starting point, and there’s no better place to look than by exploring your present situation. By carefully evaluating your current lifestyle, you can begin looking at the years ahead and what changes will be necessary to create your retirement plan. Most of us don’t have a firm handle on what we’re spending on our current lifestyle. We may have a rough idea but no clear figure in mind. Take a moment to consider what the essentials are costing you right now: food, clothing, heat, home maintenance, utilities, insurance, and property taxes. You can be fairly sure you’ll continue to pay these expenses and that inflation will increase over time. Then look at your other typical expenses. Factor in the little things, including gifts and impulse buys. You might want to select two months out of the year (preferably months without vacations or holidays) and determine exactly how much you spend.

Tracking your weekly or even daily spending is usually a very revealing exercise.

By listing current expenses, you will get an idea of what to look for during your retirement years. Many of the same spending habits will prevail, while others will change depending on your anticipated lifestyle. For example, the money you spend to commute to the office will be less if you have a two-day-a-week part-time job. However, you may be spending more money on a hobby that you have found more time to pursue. If you know your current spending and savings habits, you can start to determine how they might change in the future.

What Is Your Current Spending Style?

Experts frequently comment on three categories of retirement spenders:

Those who use their earnings only for living expenses and who try never to use any of the principal, or amount they’ve invested.
Those who plan to spend all their money, both principal and earnings, which is sometimes described as total liquidation.
Those who earmark portions of their retirement nest egg for certain expenses, which is also described as selective allocation, or creating mental accounts.

Regardless of your style, you will need to know where and why you spend your money. In Ready, Set, Retire!, we have included a *list of possible expenses to help remind you where the money goes. For example, we tend to forget the additional costs involved with having a pet or forget that those five grandchildren are all going to receive gifts on their birthdays. The dollar amounts may or may not be small, but they all add up. You also need to consider your priorities. What do you envision will be the most important uses of your money in retirement?

Meeting the needs of daily living (food, medical care, housing)?
Having money to do the things you enjoy?
Providing for your heirs?
Making charitable contributions?

If you analyze the way you think about—and subsequently spend—money, you may find that you allocate your assets into distinct categories in your head. You may, for example, put the money you spend on living expenses into one category, what you have set aside for retirement into another, and your investment assets into a third—and you don’t mix and match. Then you might earmark your bonus to pay for a special family vacation. Someone who practices the principle of mental accounting wouldn’t sell off an investment or borrow the money from a retirement plan to take a vacation but would be comfortable assigning extra income for that use. If handling money that way makes sense to you, you’ll be likely to use mental accounting in retirement as well. That can position you to identify which investments you should use for living expenses, which for special expenses, and which for preserving your estate.