The Ultimate Guide to Creating a Sustainable Retirement Spending Plan

Why You Need a Retirement Spending Plan

Saving for retirement is only half the battle. Once you retire, you face a new challenge: making that money last, potentially for decades. A retirement spending plan acts as your financial roadmap, helping you navigate this new territory with confidence.

Research shows that retirees who create a formal plan feel more confident and better prepared for retirement, according to a T. Rowe Price survey. Without a clear strategy for withdrawing and spending your hard-earned savings, you risk either living too frugally (and not enjoying retirement) or spending too freely (and running out of money).

Many seniors underestimate their life expectancy, but today people are often living 20-30 years past retirement. This means your retirement savings may need to last much longer than you think. A well-designed spending plan helps ensure your financial security throughout this extended period.

Building Your Retirement Budget: The Three Categories

The foundation of any good retirement spending plan is a realistic budget that accounts for all your expenses. Financial experts recommend sorting your expenses into three key categories:

Essential Needs

These are the non-negotiable expenses you must cover to maintain your basic lifestyle:

• Housing (mortgage/rent, property taxes, insurance, maintenance)
• Food and groceries
• Utilities
• Healthcare premiums and out-of-pocket costs
• Transportation
• Insurance (health, home, auto)
• Taxes

Ideally, these expenses should be covered by guaranteed income sources like Social Security, pensions, or annuities. This strategy ensures your basic needs are met regardless of market fluctuations, as recommended by T. Rowe Price.

Discretionary Wants

These are the "extras" that enhance your quality of life but could be adjusted if necessary:

• Travel and vacations
• Dining out
• Entertainment and hobbies
• Gifts for family
• Charitable giving
• Shopping for non-essentials

BlackRock's retirement education center points out that these discretionary expenses provide flexibility in your budget. During market downturns, you can temporarily reduce these expenses without affecting your essential needs.

Emergency and One-Time Expenses

Don't forget to plan for unexpected costs and major one-time expenses:

• Home repairs and renovations
• Car replacement
• Medical emergencies
• Family events (weddings, helping children/grandchildren)
• Long-term care needs

Setting aside an emergency fund specifically for these costs helps prevent them from derailing your retirement plan. According to BlackRock, planning ahead for these potential needs lessens the chance of unpleasant financial surprises in retirement.

The Inflation Challenge: Making Your Money Keep Pace

It's crucial to account for inflation in your retirement spending plan. The cost of living tends to rise over time—historically about 2-3% per year on average—which means that $1 today will likely buy less in the future.

Consider this example: An expense of $50,000 per year today would need to grow to roughly $90,000 per year in 20 years if inflation averages 3%. If you retire at 65 and live to 90, your spending power could be cut in half unless your income keeps pace with inflation.

Healthcare costs present an even greater challenge, as they typically rise faster than general inflation. Fidelity Investments estimates that a 65-year-old retiring today will need an average of $157,500 (if single) for healthcare over their retirement, or about $315,000 for a retired couple with traditional Medicare coverage.

Building annual inflation adjustments into your budget for expenses like food, utilities, and especially healthcare is essential for maintaining your standard of living throughout retirement.

Smart Withdrawal Strategies: Making Your Money Last

One of the biggest questions in retirement planning is how much you can withdraw from your savings each year without running out. Here are several key strategies to consider:

The 4% Rule

A well-known guideline is the 4% rule, which suggests you can withdraw about 4% of your nest egg in the first year of retirement and then adjust that dollar amount for inflation each year thereafter.

For example, if you have $500,000 saved, 4% of that is $20,000; under the rule, you'd withdraw $20,000 in year one, and if inflation is 3%, about $20,600 in year two, and so on.

While the 4% rule is a useful starting point, it's not a one-size-fits-all solution. Depending on your circumstances:

• If you retire before 65, you might need a lower withdrawal percentage
• Some experts today suggest a 3% withdrawal for a more conservative approach
• Others argue up to 5% can work if markets perform well

The Bucket Strategy

The National Council on Aging recommends the "bucket strategy," where you segment your assets by time horizon:

• Bucket 1 (Short-term): Keep 1-2 years of living expenses in very safe, liquid accounts (cash, money market funds, short-term CDs)
• Bucket 2 (Mid-term): Hold 3-7 years of expenses in moderate-risk investments (bonds, balanced funds)
• Bucket 3 (Long-term): Invest the remainder in growth-oriented assets (stocks, real estate) for the long run

This approach provides immediate cash flow while giving your long-term investments time to grow. If the market drops, you can spend from your cash bucket and give your investments time to recover before tapping them again.

Multiple Income Sources

Thrivent financial experts advise utilizing multiple income sources in retirement:

• Guaranteed income: Social Security, pensions, annuities
• Investment income: Dividends, interest, capital gains
• Other sources: Part-time work, rental property, business interests

Diversifying your income streams helps minimize risk and provides flexibility in how you withdraw funds. Try to match your essential expenses with guaranteed income sources as much as possible.

Healthcare and Longevity: Planning for the Long Haul

Healthcare costs are often the most underestimated expense in retirement. According to U.S. Bank, about 70% of 65-year-olds will require some form of long-term care in their lifetime, with costs exceeding $100,000 per year for nursing home care.

Medicare generally does not cover extended long-term care, so retirees should plan for how they would fund these costs through:

• Long-term care insurance
• Personal savings
• Home equity
• Medicaid (if applicable)

When budgeting for healthcare, be conservative and err on the high side. Healthcare costs typically grow faster than general inflation—often 5% or more per year historically. It's better to have money set aside that you end up not needing than to face a health issue without sufficient funds.

Monitoring and Adjusting Your Plan

A retirement spending plan is not a "set it and forget it" document. Fulton Bank recommends reviewing your retirement budget and portfolio at least annually, or whenever you experience a major life change.

During your annual review:

• Update your actual savings balance
• Check if your withdrawal rate is still sustainable
• Compare your real expenses against your budget
• Adjust for any new goals or healthcare needs
• Rebalance your investment portfolio as needed

Be prepared to adapt your plan based on market fluctuations and changing personal circumstances. If a market downturn significantly reduces your portfolio's value, it might be prudent to temporarily reduce withdrawal amounts to avoid selling too many assets at depressed prices, according to T. Rowe Price research.

Common Pitfalls to Avoid

Even with a solid plan and the best intentions, there are several common mistakes that can undermine your retirement spending plan:

Overspending Early in Retirement

Drawing down your savings aggressively in the first few years can backfire later. Heavy withdrawals combined with a market downturn can be especially dangerous—a phenomenon known as sequence of returns risk.

Investopedia advises keeping your discretionary spending under control especially in the first 5-10 years of retirement to greatly reduce the risk of depleting your nest egg prematurely.

Ignoring Inflation and Market Risks

Some retirees make the mistake of putting all their money in ultra-safe investments or cash. While it's important not to take excessive risk, being too conservative can lead to your assets not keeping up with inflation.

According to RBC Wealth Management, at 3% inflation, prices double in about 24 years. A balanced mix that includes growth assets (like stocks) is necessary to outpace inflation and maintain your purchasing power.

Underestimating Healthcare Costs

Many people assume Medicare will cover everything or that their costs will be similar to when they were working. In reality, Medicare has premiums, deductibles, and coverage gaps (for example, dental, vision, hearing, and long-term care are not fully covered).

The Fidelity Retiree Health Care Cost Estimate highlights that a typical 65-year-old couple might need around $315,000 in today's dollars just for medical expenses over their retirement.

Failure to Reassess Regularly

A common pitfall is treating your plan as "set it and forget it." Life is dynamic, and so is finance—interest rates change, investments perform differently than expected, laws can change, and your own needs might shift.

By staying engaged with your plan, you can make small tweaks rather than face big problems. Those who review their plans regularly are far less likely to encounter nasty surprises because they catch issues early and make gradual adjustments.

Tools to Help Create Your Plan

Fortunately, you don't have to create your retirement spending plan from scratch. There are many tools and resources available to help:

Budgeting Apps and Software

Popular budgeting apps like Mint, YNAB (You Need A Budget), or Quicken Simplifi allow you to link your financial accounts and automatically categorize your spending. These apps can give you a clear, real-time picture of where your money is going each month.

Online Retirement Calculators

Many free calculators are available from reputable sources like financial services companies (Fidelity, Vanguard, Charles Schwab) and organizations like AARP. Investopedia recommends using these tools to experiment with different scenarios and see how they affect your long-term projections.

Professional Guidance

Sometimes, the best "tool" is actually a person. Consulting with a certified financial planner (CFP) or retirement planning advisor can provide tailored guidance that no generic tool can match. Studies have shown that an actively managed decumulation (drawdown) strategy—often something an advisor would assist with—can make retirees' assets last longer than a do-it-yourself approach, according to T. Rowe Price research.