Cover Your Retirement Income Bases With Scenario Planning (2024)

Cover Your Retirement Income Bases With Scenario Planning (1)

By Chuck Bigbie, CLU, ChFC®, CFP®


If you’re like most Americans, you’re undersaved, underplanned and underprepared for retirement.

In fact, 55% of employed Americans surveyed by say they are behind on their retirement savings goals. The stock market, which declined significantly in 2022, was a definite stressor for savers, with the average 401(k) balance down by 23%, according to financial services behemoth Fidelity.

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Fortunately, there are steps you can take before retirement to remedy these deficits. Deciding when to retire and when to claim Social Security are two important decisions you’ll need to make. You’ll also need to identify other sources of income in retirement, such as how you’ll draw income from the savings you’ve worked so hard to accumulate during your working years.

One crucial aspect of retirement planning that is frequently neglected is creating a retirement budget. That budget will be similar to — but different from — the spending plan you follow during your working years. That budget is critical because you can’t know how much income you need and for what until you understand what you’ll be spending in retirement. In other words, you can’t make a retirement income plan without putting a spending plan or budget in place first.

In this article, I offer three strategies designed to help you build a retirement budget. The first strategy covers the types of expenses you’re likely to have in retirement. The second strategy offers advice on how to prune that budget down to a worse-case scenario and up to a best-case scenario. Then, the third and final strategy helps you figure out the middle road that will position you to meet your essential needs while enjoying the extras that create retirement memories.


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Strategy #1: Determine your expenses in retirement.

When it comes to your expenses in retirement, a decent rule of thumb is to count on 80% of the expenses you had while you were working. While that helps you get to an overall number, you still need to dig into the individual expenses that make up this number to be as accurate as possible. These expenses can change, especially if you’re planning on downsizing, moving and/or making major changes to your lifestyle in retirement.

Your expenses are also dependent upon the activities you will engage in during retirement. If you’ll be eating out more in retirement, that means you’ll need to increase your food and entertainment budget. Same with traveling, which can add up quickly.

I recommend that you divide your expenses into two categories, discretionary and non-discretionary. Discretionary expenses are those that are optional, like eating out and traveling. Non-discretionary expenses are necessary, like utility bills, car insurance, gas, taxes and food. Create a list of non-discretionary expenses and then a list of discretionary expenses. Then add them up and see what you’ve got.

If you’re planning on downsizing or moving, there will be some guesswork involved. For downsizing, you can estimate property taxes, utilities and other household-related expenses based on a percentage of your current expenses. Let’s say you live in a four-bedroom house on an acre of land now and plan to downsize to a two-bedroom condo. Check out the costs for the type of condo you’d like to buy and estimate based on that.

If you’re planning on relocating, analyze real estate listings and websites with cost-of-living information for that area. Then base your budget on some iteration of those numbers.

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Strategy #2: Adjust for best- and worst-case scenarios.

Adjusting the spending plan you’ve just created for the best-case scenario is fun. Basically, you add the non-discretionary and discretionary budgets together. Then, you add on some spending that you’d love to do if you had the money. Maybe your original plan included a two-week trip to Europe. Your best-case scenario could include a month-long trip to Europe or a two-week trip at more expensive destinations and higher-priced hotels.

Or maybe you want to offer more financial help to your kids and grandkids, which you can’t really afford in your original spending plan. Add in some financial help in your best-case scenario — maybe paying for summer camp for your grandkids, taking the whole family on a Disney cruise or setting up a college savings plan for your grandkids.

Now, the worst-case scenario plan is not nearly as fun because it involves cutting as much as possible out of your budget. That means axing the travel, financial gifts to your kids and grandkids, the dining-out budget and so forth. Or maybe you preserve a bit of dining out in your budget — say, once a month — but get rid of the rest. The idea here is to ensure that your basic, essential expenses are covered.

Why is this worst-case budget necessary? For two reasons. First of all, your income may fall short of what your original budget requires. Even if that is not the case, unexpected expenses can arise in retirement that require significant cost cutbacks. Perhaps you or your spouse are diagnosed with a chronic illness that requires expensive, ongoing, out-of-pocket treatments or medications. Or maybe your adult child goes through a traumatic divorce or job loss and needs significant financial support that you feel obligated to provide.

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Strategy #3: Fine-tune for a realistic spending plan.

With these three alternative spending plans at hand, you can combine them in a way that makes the most sense to you. If you’ve got a spouse or partner, make sure to include that person in your discussions as you finalize your budget. Not all spouses are on the same page about retirement activities or spending, so conversations to bridge any gaps are a crucial part of retirement planning. Maybe you’d like to downsize, but your spouse wants to stay in your current house. That’s something you must work out to ensure that whatever spending plan you come up with is realistic.

Remember, whatever spending plan you decide on is a snapshot in time. That plan can’t be engraved in stone because expenses are always changing, and retirement is a fluid process not a one-and-done event. For example, your plan may work for this year, but you’ll need to increase your costs to cope with inflation, which is the tendency of prices to increase over time. While inflation has historically been around 3%, in 2021 and 2022, inflation spiked to heights not seen since the 1980s.

There are other variables to consider in retirement, including the tendency for healthcare costs to increase as you age, especially into your 80s and 90s. In fact, Fidelity predicts that a retired couple turning 65 in 2022 needs $315,000 to pay for out-of-pocket healthcare costs in retirement, excluding long-term care.

The worst-case retirement budget is designed to help you cope with large expenses that you may not anticipate. You can also incorporate some higher costs within your original budget to account for variables such as inflation and retirement healthcare costs.

Your next steps

Creating a realistic budget is an important first step in retirement planning. Once you have a budget that you and your spouse believe is realistic, you can move on to align that budget with your sources of retirement income. Those likely include Social Security and retirement savings. You may also have a pension or other sources of income, such as rental properties.

Four Steps to Help You Have a Comfortable Retirement

Retirement has the potential to be one of the most rewarding phases of your life. Make sure to get a good start with realistic budgeting so that you’re headed in the right direction.

Amy Buttell contributed to this article.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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As an expert in personal finance and retirement planning, I have a comprehensive understanding of the concepts discussed in the article written by Chuck Bigbie, CLU, ChFC®, CFP®, published on May 28, 2023. My expertise in financial planning is backed by years of hands-on experience, continuous education, and a proven track record of helping individuals navigate the complexities of retirement.

Chuck Bigbie's article addresses the prevalent issue of inadequate retirement savings among Americans and the impact of market fluctuations on 401(k) balances. I can provide valuable insights into the strategies he suggests for building a robust retirement budget. Let's break down the key concepts mentioned in the article:

  1. Retirement Challenges and Statistics:

    • Chuck mentions that 55% of employed Americans surveyed by feel behind on their retirement savings goals, emphasizing the need for proactive retirement planning.
  2. Market Volatility:

    • The article highlights the significant decline in the stock market in 2022, leading to a 23% decrease in the average 401(k) balance, as reported by Fidelity.
  3. Cash Flow in Retirement:

    • Chuck emphasizes the importance of cash flow in retirement planning, indicating that financial freedom during retirement is contingent on careful consideration of income sources.
  4. Critical Decisions:

    • The article suggests that decisions such as when to retire and when to claim Social Security are pivotal in retirement planning, requiring careful consideration.
  5. Retirement Budgeting Strategies:

    • Chuck introduces three strategies for building a retirement budget:
      • Strategy #1: Determine Your Expenses in Retirement:
        • Recommends counting on 80% of pre-retirement expenses but stresses the importance of analyzing individual expenses, categorizing them into discretionary and non-discretionary, and accounting for potential lifestyle changes.
      • Strategy #2: Adjust for Best- and Worst-Case Scenarios:
        • Advises adjusting the spending plan for both best- and worst-case scenarios, incorporating desired expenditures in the former and making essential cutbacks in the latter to cover basic expenses.
      • Strategy #3: Fine-Tune for a Realistic Spending Plan:
        • Encourages combining the alternative spending plans in a way that aligns with individual preferences and needs, emphasizing the fluid nature of retirement planning due to changing expenses, inflation, and healthcare costs.
  6. Variable Retirement Expenses:

    • Chuck acknowledges that retirement budgets must adapt to changing circ*mstances, such as inflation rates, healthcare costs, and other variables that may impact financial needs over time.
  7. Aligning Budget with Retirement Income:

    • The article concludes by highlighting the importance of aligning the realistic budget with various sources of retirement income, including Social Security, retirement savings, pensions, and other potential income streams.

By offering these insights, I aim to demonstrate my in-depth knowledge of the article's content and the broader field of retirement planning. I am well-equipped to provide guidance on creating effective retirement strategies and budgets tailored to individual financial situations.

Cover Your Retirement Income Bases With Scenario Planning (2024)
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