5 Retirement Spending Strategies

This article is general information only and not financial advice.

They say that if you don’t plan to succeed, you’re planning to fail.

The maxim is particularly apt when it comes to financial planning for your retirement.

The first, and most obvious place to start is to maximise your retirement income, whether it comes from superannuation, the pension, other investments, downsizing or a combination of all four.

But just as important as having a substantial retirement nest egg is knowing exactly how you’re going to spend your money in retirement so you can enjoy the lifestyle you want, feeling carefree and confident.

After all, isn’t that what retirement is supposed to be about?

Here’s 5 retirement spending strategies to think about when you’re approaching retirement.

5 Retirement Spending strategies

Should you withdraw a lump sum at retirement or pay yourself a regular ‘salary’ using an annuity or an allocated pension?

Before making any decision, it’s important to be armed with all the information tailored to your unique circumstances. The only way to do this is to work with a qualified a financial planner who is up to date with what’s happening in the marketplace and familiar with all the appropriate legislation.

1. Implement the 4 percent rule

The ‘four percent rule’ is not a hard and fast doctrine, but rather a rule of thumb.

It was developed in the mid-1990s by American financial advisor Bill Bengen who noted that, based on historical market performance, clients could safely withdraw four percent from their retirement funds, and it would last thirty years before running out.

The pros

The big advantage of the four percent rule is that it is easy to understand and is mathematically sound.

The cons

In a buoyant economy, some experts say four percent is far too conservative and retirees can withdraw seven percent a year, or even up to 15 percent, quite comfortably. 

In a recession, however, the opposite is true.

Another disadvantage of the four percent rule is that it doesn’t consider changing spending patterns. Younger retirees tend to spend more on bucket-list adventures while elderly retirees spend more on health care.

2. Use a bucket approach to spending

You’ve heard of bucket-list activities for retirement – what about the bucket strategy for retirement spending?

This strategy pours your retirement dollars into three ‘buckets’:

• Bucket one (short-term) – cash (or short-term deposits set aside for enough day-to-day living expenses for three-to-five years.
• Bucket two (medium-term) – this bucket holds conservatively managed investments such as bonds and fixed interest accounts. Dividends from this bucket can replenish bucket one.
• Bucket three (long-term) – putting a modest sum in this fund gives you the opportunity to invest in stocks and other volatile types of investing that are riskier but often come with strong financial rewards in the longer term. Returns from this investment can be diverted two bucket one or two.

Pros

This investment strategy offers more flexibility than the ‘four percent rule’. It gives you cash at hand and while providing a two-tiered investment strategy that allows you to try some high-risk investments without jeopardising your whole nest egg.

Cons

The bucket approach to spending is very complex. How much is the right amount to put in each bucket? When should you cash out investments to replenish bucket one? How obsessively do you have to watch the market to know when to move money from one bucket to another?

There are some investors who are sceptical that bucket investing worked any better over the longer-term than asset allocation investing.

3. Be flexible based on market conditions

Whether you have all your superannuation in a bank account or some of it invested, there is no getting around the fact that your retirement income is going to be influenced by market conditions.

Regardless of which spending strategy you choose; it is important to plan it out with a financial advisor and meet with them at least once a year to evaluate results and adjust strategy as your personal circumstances and the market change.

4. Prioritise spending on essentials first

Whether you’re in retirement or are several years off, there is one universal rule of finance – identify essential spending and prioritising paying bills before discretionary purchases.

American financial advisor Dave Ramsey describes essential spending as ‘four walls’ – food, utilities, shelter, and transport.

By prioritising spending in the order listed above, you can be confident that the essentials are covered.

One of the best ways to ensure that you’re not caught on the hop by a quarterly electricity bill or half yearly council rates is to amortise these bills, so you know how much you need to have saved each month.

Zero-based budgeting allocates every dollar towards all your known expenses, as well as allocating an amount for ‘fun money’ and a ‘sinking fund’ to cover emergency expenses.

5. Plan for unexpected expenses

Having an emergency fund in an interest-bearing bank account is great for peace of mind – as well as financial protection against unexpected expenses.

Aim to set aside between three to six months’ worth of expenses to cover unplanned purchases such major car repairs or an unexpected hospital stay.

Sit down with your budget regularly and review where your spending has been over the previous six to twelve months and predict where future spending is likely to take place.

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You don’t even need to be retired.

After buying your home, the only ongoing charge is a modest weekly site rental fee that covers maintenance of the resort and its facilities, which makes it easier to plan your retirement budget.

Enjoy a great lifestyle today at a GemLife over-50s lifestyle resort which are in some of the most sought-after retirement locations in Australia. Contact us today for an information pack and to arrange an inspection tour.