How much are you spending post-retirement?
Most people think that they will spend less money after they retire and hold back any unnecessary expenses. In reality, people spend more, at least in the first few months as they are not aware of the regular expenses to expect. Economists at the Investment Company Institute (ICI) and the Internal Revenue Service (IRS) analyzed the tax data and created a report, which shows that after claiming social security; more than half of the taxpayers are spending more during the first three years. The analysis report by ICI shows that Americans maintain or increase spendable income after they claim their Social Security. Nearly 90 percent of the Americans hold or have income from employer retirement plans, IRAs or annuities, says the report.
Spending habits define how well you handle your finances. While you’re working, you will have great plans for your retirement on how much to spend and save for a comfortable living. But in reality, it doesn’t work with a plan. It takes time to analyze our expenses, and then you can follow a routine to cut down over spending. And so, you plan well & save more for the retirement and you can take control over the expenses post-retirement. But this doesn’t mean spending won’t slow later in retirement, researchers said. People with different income margins have different spending habits. The three categories of people with their spending habits:
Category 1: People with lower income
Everyone has big dreams for their retirement. Some people plan well in advance to achieve those dreams. Before retirement, we all calculate and create a budget to follow when we retire. But does everyone abide by the budget? A survey says that people with lower income spent more than they were before retirement. The survey was based on the income left after taxes and not the actual spending count. The lower-income earners were more dependent on social security benefits than the retirement income. The survey report and its components: The researchers stated in the report: “For many individuals, retirement appears to be a multi-year transition rather than an action taken at a discrete point in time.” The report by Investment Company Institute economists (ICI)was made keeping in account the following factors:
- Salary and wages
- Social security benefits &
- Retirement income (distributions from employer plans (401(K)), annuities & IRAs etc.)
Category 2: People with mediocre income
The survey says that people in the category of mediocre income also spent as much as the people with lower income. For people with mediocre income, social security plays a vital role post-retirement.
Category 3: People with higher income
On the other end, the people with higher income spent slightly less than the lower and mediocre income earners. The retirement income matters more to the higher-income earners than the rest. For the people with higher income, the benefits from the employer through 401(k) account would be high as well and so is the dependency on it post-retirement.
So, how to save for retirement?
With the fluctuating needs and expenses, you might feel it difficult to have a fixed goal when it comes to how much to save for your retirement. As there will never be a fixed amount for how much to save but you can have a fair budget to chase. The thumb rule: Instead of chasing a moving target, define your budget. The experts give you a thumb rule for how much to save for retirement, which suggests that most of the people devise to spend nearly 70 percent of their pre-retirement income (current income generated while working) in retirement. Now that you have a tentative figure of how much you might need to save, the next question would be: Have you saved enough for your retirement? Few of us think that their spending habit will remain constant after retirement and thus can save a fixed amount to secure their future. But that’s not the case. Initially, you might not understand how to handle your expenses and where you can cut on the edge. One thing is that your spending could drastically fluctuate every year, especially when you are looking for a long time to retire (maybe 30 years or more). The report stated that most people claimed their social security at the age of 62 to get the benefits of it later. Also, there were a set of people (nearly half) who were still working 3 years after they claimed social security. For a bigger benefit, it’s better to delay taking social security and enjoy the benefits to the fullest. So, what is the right time to claim social security and enjoy the benefits?
Post-retirement you might feel that you would spend less and focus on the essentials alone. In the initial phase, you would spend for leisure as well. So, prepare yourself well in advance for your retirement to make it a painless journey.