Get Oriented to Handling Your Retirement Income and Expenses
By Shane Flait ©2008

When you start your retirement, get a handle in what your income is and what your expenses are. Maximize the former and minimize the latter to give you more to do what you want.

Planners often quote 75% of your pre-retirement income as the income you need to live comfortably. But this assumes that some 25% of your pre-retirement income went to work and its associated taxes, transportation and clothes - and savings toward retirement. And it assumes you’re going to living where and as you did except for working. That need not be the case.

You can live well at much less expense if you’ll move to lower your housing expense and reduce other unnecessary expenses too.  Let’s get an overall picture of what you want to consider.  

Know your income – the pillars that will support your living:
The three ‘pillars’ of income during retirement are social security, pension, and your savings. But for some of us, we need to do some part-time work too – at least for the early years of retirement.

According to the Social Security Administration, more than 9 out of 10 individuals age 65 and older receive Social Security benefits, but most retirees also rely on other sources of retirement income. The pie chart[1] shows were income comes from by a 2006 study.

You can see that social security contributes almost 40% for the average retiree. Find out what your Social security benefits are or will be. You can take it early – at reduced benefits – or later – at increased benefits – than the amount slated for you at your Full Retirement Age (FRA). FRA is between 65 and 67 for most of you and depends on your date of birth. Social Security benefits also give a cost of living adjustment (COLA) each your.

The traditional company pension accounts for only 20%. These generally don’t have a cost of living adjustment. Check to see how much and if a COLA is included. Both these pillars, SS and pension, will give you income for life – income you can count on.  With that known you can see how much to pull out of your savings for additional help.

Your savings are composed of your savings accounts and your defined contribution plans – 401(k), IRAs, etc. You’ll want to choose the best way to convert these to income. Possibilities include converting them to an annuity, another form such as an IRA, or Roth IRA, and devising your own withdrawal procedure that ensures that your savings will last as long as you. Taking about 4% per year from savings will generally maintain the value of your savings. This implies a 7.5% yearly growth in your savings.

If working part time is necessary, then find a job that is enjoyable for you. After all, you’re in your retirement years and should pick what’s best for you. Perhaps some consulting based on your previous work is possible. But whatever it is, make sure you have some fun at it and leave plenty of time to get golfing, fishing, or whatever into your life.  Actually, a little work makes the ‘off-time’ more rewarding.

Get a handle on your expenses
Controlling your expenses helps prevent them from robbing needed income. You can categorize your expenses under essentials, debts, taxes, and enjoyment. Essentials cover your food, housing, and transportation. Housing and transportation may have more inexpensive alternatives you can choose from.

Your expenses change over your latter years. The table below shows expenses generally decrease with increasing age. That’s because our interests and capabilities change during these years.  Notice, though, there’s a continual increase on health care costs.

 You may want to view retirement as a progression of phases, such as early, middle, and late. This involves taking a fresh look at retiree expenses and income, as well as withdrawal and estate planning strategies. We must build flexibility into planning our retirement years.

You can reduce living expenses with the same quality of life several ways. You can sell-down your house. Find something inexpensive and convert much of your old home equity into more savings to generate income. 

Don’t forget about moving off-shore. Many locations offer beautiful condominium living at a small fraction of you house value. Other living costs are often inexpensive too. You need to consider how it’ll impact your enjoyments that depend on where live now, though.

Get out of debt
As you approach or begin retirement, the last thing you need - much less create more of – is debilitating debt. You’ll need all the income you have to use for important expenses that are worth it or for savings to add to.  A budget can set you free to enjoy your full income.

Budgets are especially useful when a major life change is on the horizon such as entering retirement. Such a situation generally brings a shock to any existing spending patterns.

Creating and using a budget is a valuable tool to get you out of debt. Any budget should focus on identifying and classifying all the expenses that occur during the month, quarter and year. Small purchases can and do add up. Many people find that just looking at aggregate figures for discretionary spending spurs them to reduce excessive spending.

Goals can include identifying expenses that can be reduced or cut (such as entertainment and shopping), as well as minimized - such as any interest paid on credit cards and home equity line of credit. Unnecessary interest costs eat away available income.

Determine the amount of discretionary income you can use to allocate to debt reduction

Take a typical month's worth of income and spending data to determine your discretionary income. This is your total month's income minus your necessary expenses. Necessary living expenses include rent/mortgage, food, clothing, utilities, education, and possible auto payments. Don’t include amounts that you send to credit card companies or repay on consumer loans.

You’ll use your discretionary income to pay down these consumer debt expenses as fast as you can. Some debt, such as car financing, comes with specific repayment schedules, but rolling debt instruments like credit cards can generally be paid off according to one's personal ability to pay.

If you have any liquid savings, you may use some of that to help out. It's much better to pay the credit cards off first. That’s because most credit cards charge between 5% and 30% interest annually which sometimes outpaces what the average investor can expect to earn from stocks, bonds or funds.

Leave yourself a little discretionary income to celebrate how much your reducing debt is freeing your income for better things to come.  With your expenses minimized, you can better plan on the travel and enjoyments that you’ve set aside for your retirement years.

Taxes are pretty much dependent on how you choose to handle your distributions from savings and what tax category your savings are in – tax deferred, taxable or tax free (such as a Roth IRA).

 Learn how to make what you have and what you do bring enjoyment to your retirement years.

 Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com