An Overlooked Key to a Successful and Happy Retirement

Successful retirement planning requires many steps — estimating how much you’ll need, planning for healthcare costs, managing your portfolio, estate planning, and more. But there’s an essential step that tends to get overlooked: Using a budget to proactively manage your spending.

You can’t manage what you don’t measure

For many years, financial planners advocated the four percent rule. The idea was that retirees could withdraw four percent of their nest egg each year without worry (or at least without too much worry) of running out of money. However, longer lifespans and lower interest rates have brought about the need for more detailed approaches.

One example involves taking a dynamic spending approach. Instead of withdrawing a fixed percentage of a fluctuating nest egg balance, each year you reassess multiple factors, including the upcoming year’s likely spending. Of course, it’s easiest to estimate future spending if you’re acclimated to using a budget.

Another example, includes the use of a cash bucket — a savings account that contains one to three year’s worth of living expenses that would not otherwise be covered by other sources of income, such as Social Security (For more on this idea of, about half way into this article, see the “optional refinement for those using stock/bond portfolios”). The idea is to avoid having to sell stock investments in the midst of or right after a sharp market decline. This approach will also be much easier to manage if you have a good handle on living expenses.

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