Why You Need A Retirement Spend Plan and How to Build One, Part 1:Spending

What is a Retirement Spend Plan?

A retirement spend plan ensures that you have sufficient income to cover your expenses throughout your 35+ years of retirement.  It’s a plan that aligns your money flows—money coming in and money going out.  It helps to make sure you don’t run out of money or die with a mattress stuffed with cash.  Both of these outcomes are undesirable and can be avoided with a retirement spend plan.

Let me start by saying a Spend Plan is NOT a budget, per se.  Building and following a budget is not natural for most people.  It’s a good exercise for those with more modest means, but most people simply can’t or won’t follow one.   I’ve changed my view on this over the years and have stopped insisting clients create a budget.   There’s a better way. 

You need a Spend Plan if you want to successfully transition away from the workforce. You need to have a plan for how much you’ll need to withdraw, from where and when. You’ll need a plan for money flows, in and out. But you can’t really build one without a sense of how much you spend. People often can’t seem to get a handle on the spending side of things, because they equate this exercise with an exercise in budgeting. But you can do it. This article will address the spending side of the equation: how to get a clear picture of how much money you will need in retirement.

Why You Need a Spend Plan:

Prior to leaving the workforce, you have a regular paycheck which is your earned income. For most, a paycheck acts as a natural guardrail to your spending, unless you are over-using credit. However, once you leave the workforce, you will no longer have a paycheck. Therefore, you will no longer have that spending guardrail. You will have to create your own guardrails. To achieve this, you must first have an estimate of your spending.

Put simply you need a spend plan in retirement, so you don’t overspend and outlive your assets or underspend and hoard your cash.

Steps to Building the Spend Plan: The spending side of the equation

A complete spend plan includes both the income and the spending sides. For now, we’ll concentrate on your spending. To estimate your retirement spending needs, start with your current spending.  How much are you spending now, before you retire?   This exercise should be done a couple years before you retire, if possible.

  1. Figure your pre-retirement baseline spending.

Follow this simple formula to come up with an estimate of your core expenses, and use it as a baseline to build from.

Gross Income – Federal Taxes – State Taxes – Savings/Insurance Premiums = Amount Spent*

This formula suggests that you are spending, in one form or another, all your after-tax income that you do not save. Most people don’t really know what they are spending, or if they do, they usually underestimate it. This approach is simple and honest. And sometimes surprising. 

2. Adjust your baseline spending for:

  1. Fun/Travel/One-time Expenses.
  2. Employer / business paid expenses.
  3. Health care expenses**.
  4. Other tweaks such as declining spending in later retirement years.

3. Apply an inflation rate and project your expenses forward beyond your life expectancy, till age 95 or 100.

4. Test for changes in income and expenses, and other factors.

5. Review and update your spend plan yearly. Wash, rinse and repeat what works.

Case Study: A Look at Frank and Joanna:

Here is a simple case study.  Frank and Joanna will be retiring in two years.  We went through an exercise to  create a spend plan, so they could better understand the money flows and be comfortable making the decision to leave the workforce.

The Formula:

Gross Income – Federal Taxes – State Taxes – Savings/Insurance Premiums = Amount Spent*

Frank and Joanna’s Spending:

Gross Income: $250,000

Less Federal Taxes of $26,000

Less State Taxes of $12,500

Less Savings into 401k’s of $22,000

Less Insurance Premiums of $22,000


Amount Spent: $129,500

So now we know that Frank and Joanna spend about $129,500 annually, or at least they did this year.  This year was a typical year for them, no unusual expenses, so we can use this year to represent their annual spending baseline. 

We made adjustments to this baseline to accommodate their stated desire to travel more, adjusted for the changing cost of insurance with Medicare at 65 and their later life health care expenses. We also reduced their spending needs later in life in their 80s, the “slow-go” years, assuming less travel and entertainment.  And finally, we applied appropriate inflation rates to the spending for future years.  So now we have an approximate income need that can be used to build the spend plan. 

The next step is to ensure that we can cover their spending needs with their money flows (e.g., their savings, Social Security, pensions and income annuities) and to create a “paycheck” to cover their expenses during retirement. The challenge is to ensure that Frank and Joanna have enough income to last 30-35 years. We test and retest. If they don’t have enough, we go back to the drawing board and look for ways to reduce expenses or increase income. On the other hand, if we determine they will have lots of money left over, then Frank and Joanna have more options, such as increasing spending, giving or maybe even buying a second home.

True Financial Planning

Like all good Financial Planning, your spend plan should be adaptable and agile. . The process to build the spend plan stays the same. . Your circumstances and priorities may change, the economy will change and your planning must adapt. True financial planning will help you be confident amidst changing circumstances. You will know that you have sufficient resources to retire. your money is aligned with and flows to your life and your needs. As always, the process uses both the quantitative and the qualitative, and can be tricky at times.  

Using this repeatable process, our firm works with women and couples nearing retirement age to help align their values with their money and make smart financial decisions. 

Please reach out for a conversation or question, or if you want a partner who can guide you through the retirement spend plan process, and help you make smart financial decisions while doing so.  

Disclosure: All examples are hypothetical and for illustrative purposes only.

*If you have income and/or expenses that are variable each year, you can use the above formula for a period of 2 or 3 years and average the result.  

**This is the 10,000 lb gorilla. How does one estimate this number?  Stay tuned for a future article on this topic.


Some Additional Notes to add:

Like all planning, your spend plan should be nimble, agile. 

Your retirement Spend Plan Needs Guardrails. You have to make your own guardrail to spending.

Because you are creating income for what could be 35-40 years,

Among other things, a good retirement planner will help you create a retirement paycheck using your savings, pensions, income annuities and Social Security to cover your expenses for the next 30 or more years.   

There are other more nuanced benefits that come from the development of a spend plan

There are a variety of approaches to budgeting and spend plan development, but the key point is developing a solid estimate, stress test it, adjust and re-evaluate, like all good planning.

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