16 Wednesday, September 11, 2019 17:49

This Common Spending Habit Could Potentially Ruin Your Retirement

When youre planning for retirement, the bulk of the work is centered around saving during the years leading up to when you retire. Many people, then, think that everything will be smooth sailing once they finally leave their job.However, its equally important to consider how youll spend your money once you retire.

Because no matter how much planning you put into saving, if you spend too much each year in retirement, youll run out of money sooner than you expected.Even among those who do have a withdrawal strategy to ensure theyre not overspending in retirement, that strategy may be based on a flawed assumption.

One of the most popular guidelines for determining how much you can withdraw each year in retirement is the 4% rule, which states that you can withdraw 4% of your nest egg the first year of retirement, then adjust that number each subsequent year for inflation.In other words, retirees basing their retirement withdrawals on this guideline are assuming theyll be spending roughly the same amount every year.

However, this common mistake could lead to financial troubles down the road.
Image source: Getty ImagesResearch shows spending isnt static in retirementAssuming your spending levels will remain relatively static throughout retirement makes sense in theory, but in reality, most retirees see their spending fluctuate each year.

Nearly 80% of retirees experience significant changes in spending over the course of retirement, according to a study from J.P.Morgan Asset Management. Just over half of retirees saw temporary shifts in spending, the study found, but roughly a quarter saw significant increases or decreases in spending levels throughout retirement.

Retirees most commonly saw their expenses increase in the months leading up to and immediately following when they retired, according to the study, which can likely be attributed to traveling, home renovations, and other expensive bucket-list items retirees are eager to check off as soon as they retire.

Spending levels then tend to gradually decrease over time, though they may increase again as retirees age and start seeing medical expenses pop up more frequently.Now, fluctuating spending levels in retirement isnt necessarily a bad thing. Some expenses -- like healthcare costs -- you cant always control, and its human nature to want to splurge on vacations and new hobbies as soon as you retire.

The important thing is that youve budgeted for this spending as you were planning for retirement. If youve created your retirement plan under the assumption that youre going to be spending the same amount every single year, overspending during even one or two years of retirement can throw off the rest of your plan.

.If you want to be truly successful in retirement and ensure your money lasts as long as possible, its important to make sure you have an accurate idea of how youll be spending your money during your golden years.How to plan for retirement as accurately as possibleTheres no surefire way to.....

News Code: 345176  |  Motley Fool
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