Note: This story is sponsored by The Alliance for Lifetime Income.
Picture this: You’re retiring. No more 6 a.m. alarms. No more 35-minute commutes. No more stressing about whether pants or a dress are more appropriate for today’s meeting. No more scratching your head at 3 p.m. trying to remember whether you made time for lunch (or to visit the loo, for that matter.)
It’s a lot, this new freedom, and you would think that it would come with some financial flexibility, too. (Think of all the money you’ll save on work clothes alone.) But a new study from the Alliance for Lifetime Income shows that retirement may not bring as much of an ability to play fast-and-loose with your finances as you’d think.
On average, Americans in or approaching retirement consider two-thirds of their expenses to be essential. About half believe those essential expenses will stay the same in their new phases of life, but about 14% believe they’ll rise and the remaining third believes they’ll fall.
How can you figure out where the truth lies? You have to begin by understanding what those essential expenses are. Enter: M.U.G. It stands for Mortgage, Utilities, Groceries. (For the record, mortgage or housing ranked first among essential expenses named by survey respondents, followed by groceries, with utilities in third place. Healthcare was next, followed by transportation and then cellphone/internet.) And you may have others on your personal list of items you’re not willing to cut (clothing, life insurance, travel and charity all ranked high for some participants). The idea is that you add up your essentials, and then figure out if you’ll have enough money coming in on a consistent basis to cover them.
- So, what’s your M.U.G? Start with mortgage (or housing), utilities and groceries. Then add the other expenses you are unwilling to compromise on. Look back at your past few months of bills to get a true idea of your total. Yes, the amount you’re spending on them will go up with inflation, but at least you have a place to start. “Each person’s M.U.G. is going to be different,” notes Alliance Executive Director Jean Statler. “For some, it may include things like their monthly condo fees or car payment. For others, it could include their medicine or monthly gym membership or, in my case, it could stand for my family. As a mother of three, being there and supporting my kids is an essential expense. M.U.G. is simply a symbol to get people thinking about their essential expenses and must-have money in retirement.
- Consider if you’re willing to cut back. Once you’ve got an estimate of the essentials, think about (and talk to your partner about) where you might be willing to compromise. The survey showed, for example, more people were willing to cut on food costs (particularly by reining in meals out) than utilities or healthcare. And entertainment was an easier item to slash than communication costs.
- Figure out where the money is going to come from. Once you’ve got your non-negotiable budget, the goal is to make sure that you’ve got enough income coming in – for life – so that you can cover it. Most people don’t believe they have that, explains Statler. According to the research, only 29% of survey respondents are very confident that they’ll have enough to pay for their essential expenses throughout retirement. Social Security will undoubtedly help, but it only covers 40% of preretirement expenses on average. (Pay attention to the word “average” in that context. If you earn $50,000 before retirement, Social Security will replace a decent chunk of that. If you earn $100,000 or more, it will replace far less. You need to know what percentage of your spending will come from this source. If you’re unsure, go to socialsecurity.gov and check your most recent statement.)
- Think about whether other sources of lifetime income make sense. As for the rest of your essential (or non-essential but desired) expenses, unless you have a traditional pension (only 17% of Americans do), this is what your retirement savings are for. The question is: How do you use the money you’ve saved to serve this purpose? Some 60% of Americans surveyed by the Alliance are either very or moderately concerned about the prospect of withdrawing their money in retirement. This is one reason many experts (including me) suggest converting enough of a chunk of your savings into a lifetime paycheck to cover your fixed/essential expenses while continuing to invest the rest for growth. Retirement can last decades – and interest rates are currently very low. Both of those are good arguments for maintaining a position in the markets.
- Look to your 401(k) for guidance. Finally, under the SECURE act, you will soon start seeing the money you’ve saved in many retirement accounts expressed as a lifetime paycheck in addition to a lump sum. Use it as a guideline. If the number you’re seeing is far less than you know you’ll need down the road, consider it motivation to try to amp up your savings rate as much as possible.
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