Indulging in Luxurious Spending During Retirement is Absolutely Justified
In the realm of retirement planning, striking a balance between essential expenses and discretionary spending is crucial. A common guideline suggests limiting discretionary spending so that total withdrawals from your retirement savings do not exceed about 3.3% to 4% of your nest egg annually. This helps to avoid depleting your funds prematurely while covering both essential and discretionary expenses.
Traditionally, withdrawing about 4% of your savings yearly (e.g., $40,000 per $1 million saved) is considered sustainable for 25–30 years, covering all expenses. However, newer advice suggests retirees lower this to about 3.3%, reflecting current lower market returns and rising inflation, to better preserve capital.
Prioritizing essential expenses is key. Divide your spending into essential expenses and discretionary “wants.” Cover essentials first, then adjust discretionary spending depending on market performance or cash flow situation. Discretionary spending should be flexible to avoid financial strain in lean years. If markets perform poorly, reduce discretionary spending proportionally, and if markets perform well, discretionary spend can be a bit higher.
Within an overall spending budget aligned to the withdrawal rate, discretionary spending often constitutes a portion but is not fixed as a percent of total savings. Some personal budgeting methods suggest up to 30% of income can go to discretionary spending, but this applies more broadly to working budgets rather than fixed retirement withdrawal percentages.
Personalization is key when it comes to discretionary spending. Factors such as other income sources (Social Security, pensions, rental income), healthcare costs, lifestyle desires (travel, dining out), and inflation should shape your discretionary budget alongside advice from a financial advisor.
Interestingly, approximately 85% of American adults consider having hobbies to be important in their lives. Hobbies that cost little to nothing include birdwatching, planting a garden, or going to a car show. These activities can provide enjoyment without adding significant financial burden, making them an ideal addition to a balanced retirement budget.
Moreover, research suggests that pursuing interests is directly connected to a person's level of satisfaction with life. Assess your finances honestly to determine how much you can spend on yourself, ensuring you're treating yourself without guilt. Saving for retirement is fiscally smart, but it's also important to enjoy the fruits of your labour.
Gifting money or assets now lets your kids benefit from your wealth when they need it most. Married couples can gift up to $38,000 per recipient by electing to split gifts. This strategy can help distribute wealth while minimising tax implications.
Lastly, even when money is tight, prioritizing paying bills is essential. However, even a small surplus can fund a dinner out to boost your retirement enjoyment. Maintaining financial security in retirement means finding ways to enjoy life without compromising your long-term financial stability.
In summary, while discretionary spending budgets vary individually, keeping total withdrawals (both essential and discretionary) to around 3.3–4% of your retirement savings annually is a prudent way to maintain financial security. Within that, discretionary spending should remain flexible and preferably less than your essential costs to allow for a sustainable and adaptable retirement lifestyle. Consulting a financial planner can tailor this plan based on your personal financial situation.
In the context of retirement planning, it's important to consider discretionary spending as a portion of your overall spending budget. This flexible spending, which should ideally be less than essential costs, can be adjusted based on market performance or cash flow situation. (Personal-finance, discretionary spending)
When creating a discretionary spending budget, it's crucial to take into account factors such as lifestyle desires, healthcare costs, and inflation, in addition to seeking advice from a financial advisor. (Personal-finance, discretionary spending, financial advisor)
