Retirement can be the time to live some of your dreams, but needs don’t disappear. Here’s how to help balance what you want with what you must have.
Distinguishing wants from needs is a big part of any financial literacy or education effort. But what about needs and wants in retirement? Retirement, after all, is supposed to be the time in your life for which you’ve worked, saved, invested and planned so that you don’t have to be worried about needs and can do what you want.
As economist Ben Harris, visiting associate professor at Northwestern University’s Kellogg School of Management and Alliance for Lifetime Income Fellow, explains, that scenario isn’t true across the board.
Retirees fall into four distinct economic groups, he says. First are people who have earned a low income throughout their lives and don’t have any meaningful retirement savings. Second are lower-income and lower-middle income folks who have done a little better, perhaps paying off a home, but not building a retirement stash. Third are middle income and upper income individuals who have managed to accumulate a fair amount of retirement savings. And fourth are middle- and upper-income individuals who, surprisingly, haven’t saved at all. Interestingly, the first and second groups will likely be able to maintain their pre-retirement standards of living because they haven’t been overspending throughout their lives. The third group has saved enough to cover their needs and wants. It’s the fourth group that Harris worries about. They’ve been overspending the entire time, he says
No matter which group you fall into, you need a plan that allows you to cover as much of both your needs and wants as possible. Here are the steps to help.
Think of your lifestyle as a continuum of expenses, advises Michael Finke, professor of wealth management at The American College, and Alliance for Lifetime Income Fellow. There’s your basic lifestyle, which includes the expenses you need to cover food, utilities, property taxes, healthcare insurance, and the like. Because these are needs that you’re likely to have throughout retirement, you want to ensure you can pay for these expenses.
Budgeting tools and apps can help you take a backwards look to figure out how much you’re spending each week, each month, and each year. You can then look at your analysis and ballpark whether your spending might stay consistent once you retire or not. For example, commuting costs and work clothing may not be required. The amount of money you’ve been saving for retirement is also an expense that goes away in retirement.
But there are other expenses that may grow such as a leisure activity as well as surprises. Healthcare expenses can become an issue, says Wade Pfau, professor of retirement income at The American College and Alliance for Lifetime Income Fellow. “Anyone who retires before age 65 has to be sure they have a way to fill the gap until you’re eligible for Medicare,” he explains. “Then health care expenses start to grow again in your 80s, typically.” And remember, Medicare doesn’t cover all of your healthcare expenses.
The good news is that research on real-life retirees says that they’re better at balancing the wants versus needs equation than you might expect. “The academic evidence is pretty strong that most people are able to do what they were able to do before retirement,” says Harris.
The trick is to position yourself for resilience. That may mean spending less when you can, making trade-offs for long-term security.
“When economists think about happiness over your entire life, basically what causes you to be unhappy is if you lived a certain lifestyle and finding out that you can’t afford it anymore,” says Harris. Hedging your bets by putting aside money for your fixed expenses or working another year or two in order to secure that stable retirement lifestyle is, in his opinion, the way to go.
A version of this article originally appeared on HerMoney.
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