Retirement offers a chance to pursue your dreams, but essential needs persist. Balancing desires with necessities is crucial for a satisfying retirement.
Distinguishing wants from needs is key to financial education. In my work producing a financial literacy magazine for young students, we define needs as food, shelter, appropriate clothing, school supplies, and transportation. Wants encompass everything else. In discussions on the podcast, we expand this to include emotional needs that also require attention.
But what does it mean to balance wants and needs in retirement? Ideally, retirement should be a time of fulfilling your desires, free from financial worries. However, reality can differ.
According to economist Ben Harris from Northwestern University, retirees often fall into four financial categories. The first group consists of individuals with low lifetime earnings and minimal retirement savings. The second includes those with better financial stability, potentially owning homes but lacking significant retirement funds. The third group has accumulated decent retirement savings, while the fourth, surprisingly, comprises higher earners who have not saved adequately. Interestingly, the first two groups may maintain pre-retirement living standards due to their frugal spending habits, while the third group can cover both needs and wants. The fourth group raises concern, as they tend to overspend.
Regardless of your category, crafting a plan to meet both needs and wants is essential. Here are steps to guide you.
Step 1: Secure your essential needs with reliable income.
Consider your expenses as a continuum, suggests Michael Finke, a wealth management professor. Basic expenses include food, utilities, property taxes, and healthcare premiums. Since these will persist throughout retirement, minimizing risk with the funds allocated for these costs is vital. You might keep the money in cash, which loses value over time, or invest in CDs for better returns. Alternatively, an income annuity could provide even higher returns by pooling risk with other investors. Finke explains that, at current interest rates, $25 buys $1 of annual income for life, while an annuity can offer $1 for $18, ensuring a lifetime income without the risk of outliving your resources.
Step 2: Recognize that some needs may decrease while others may emerge.
Identifying consistent needs requires effort, but budgeting tools like YouNeedABudget (YNAB) or Empower can help track spending. Analyzing your expenses can give you insight into your financial habits and whether they will change in retirement. For instance, if your commute costs hundreds each month, that expense may disappear, as might work attire and daily lunch expenses. However, be aware that you may incur additional costs in retirement, such as leisure activities or healthcare. Wade Pfau, a professor of retirement income, emphasizes that retirees should plan for gaps in healthcare coverage before Medicare begins and anticipate rising healthcare costs as they age.
Step 3: Identify areas for flexibility and adaptability.
Research shows retirees often manage the balance between wants and needs better than anticipated. Harris notes that most people can maintain their lifestyle post-retirement without drastic sacrifices.
To ensure resilience, consider reducing discretionary spending during market downturns. This might mean fewer vacations or dining out less frequently. Viewing these adjustments as trade-offs for long-term stability can lead to a happier retirement.
Harris points out that unhappiness often arises from an inability to maintain a previous lifestyle due to financial constraints. At age 65, uncertainty about the future looms, with possibilities ranging from a short or long lifespan. Setting aside funds for fixed expenses and considering working longer can help secure your desired lifestyle.
For additional resources, visit www.RetireYourRisk.org.
