While retirement is the goal that most investors have worked toward, many retirees still experience a bit of panic when they no longer receive regular income. Adding to their unease is the reality that the cost of living will continue to rise during a retirement that could last 25 years or longer.
Retirees witness rising costs in groceries, fuel, utilities, and more. Yet, they also see their friends and neighbors buying new cars, making home renovations, and going on vacations. They begin to wonder why they can’t afford any of this. Why is it that they retired and now find themselves financially constrained?
Are the people you see thriving living within their means, or do they have a financial plan?
For the clients we work with, we employ the Ten Year Rule, which sets aside 10 years of expenses in fixed-income investments to protect the money they will need later from the volatile stock market. This money covers basic needs, home repairs, vacations, and new cars, in addition to supporting a retirement lifestyle, such as hobbies and leisure activities that investors always say they’d pursue once retired.
We also account for inflation. At Henssler Financial, we have generally assumed an annual inflation rate of 4.6% in our financial plans, which may seem high, given the Federal Reserve’s target rate of 2%. We also review and update clients’ financial plans every two years, allowing us to recalculate how inflation and spending have affected their plans.
Our plans incorporate an annual increase in spending; however, we often find that most investors do not increase their spending but rather adjust to inflation, a habit they developed during their working years. The plan also shows how much their maximum spending could be, assuming their assets last until age 92. We recommend clients keep actual spending around 85% of their maximum spending. The difference between actual spending and maximum spending should allow investors to weather economic changes.
A financial plan allows investors to see the entirety of their circumstances. For example, we expect that in 2025, the investor will allocate $50,000 for a new car. We anticipate that in 2027, the client will want to replace the windows in their home. We also account for increased health care costs as clients age. The financial plan is a crucial piece of the puzzle that provides clarity on where you stand financially and what the future holds for your money, ensuring you do not outlive your assets.
We run the plan to show investors where they currently stand, with spending and what they can spend without depleting their assets. Once the initial guidelines are in place, we can begin projecting different scenarios incorporating expenditures such as vacations or assisting a grandchild with tuition. A financial plan is not an immediate fix; however, after a year or two, investors can see how the plan works and adjustments that may be needed to adapt to economic changes, their lifestyle, and their desires.
If you have questions on how a financial plan can accommodate your spending needs in retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the September 9, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
