4 Tips For A Happy Retirement

Co-produced with PendragonY

Introduction

Retirement planning is an essential process that can be broken into two stages. The first stage is planning how much you are going to save, including what you will invest in to increase the size of the money you have set aside. At High Dividend Opportunities, we use the Income Method to help identify what to invest in. We work on building up a portfolio of investments that pay dividends or interest, providing a ready-made income stream to start drawing on when you retire.

The second part is just as important, and a lot less fun. It is budgeting for your retirement years. By establishing a budget, you determine how much cash your savings have to produce in a year. This, in turn, will determine both how much you save and what you purchase.

The process is iterative in part because the size of your portfolio and your budget are both just estimates. Your portfolio estimate might produce too little income to cover your proposed budget. If that is the case, then you will have to find a way to grow your income or review your budget and cut less important expenses.

Each year, both as you approach retirement and after, you will have to update both the budget and the portfolio. This will enable you to make any course corrections as needed, which is essential if you want to succeed.

Retirement is so Very Expensive

Folks nearing retirement often get advised that their spending in retirement will be around 70% of their pre-retirement spending. This advice is based on the fact that you won’t be driving to work each day, won’t need to spend money on clothes for work, and will eat more lunches at home. Some will also say you won’t be saving for retirement anymore. This is terrible advice. Don’t believe it.

This all ignores one very big fact of retirement: You’ll likely spend more money. There is a reason they say that time is money. In retirement, you will have a lot more of it since you will no longer spend 8 or more hours at work each workday.

This extra time can be a great boon: You’ll have time for new hobbies and time to travel. All of that costs money, money that you didn’t spend when you were a full-time worker. I often tell my wife, “I’m either spending money or making it.”

Other challenges you will have are inflation and increased medical expenses. Your huge pile of cash will appear smaller over the decades. Then as you get to your 70s, 80s, or 90s, you will find that you know a lot more doctors on a first-name basis. You will also become keenly aware that doctors are well-paid.

So, while some of your expenses may decline when you retire, there are plenty of things to spend money on that you didn’t have time to do when you were working.

The first step in retirement planning is a realistic budget that allows for all the things you will do in retirement.

It Happens, You Can Bet the Farm on That

It is a fact of life that the unexpected will happen – that doesn’t stop when you retire. So you need to plan for unexpected expenses: The roof may need to be repaired, the septic tank may need to be replaced, pipes may burst, and medical or dental issues will arise.

First, set up a rainy day fund with about 6 months of expenses in addition to any other emergency cash you are keeping. As you spend it down, fill it back up with income from your portfolio. Just like your car’s gas tank, having a reserve to keep you rolling is essential.

Also, include flexibility in your monthly budget. Many people find it works well to have about 10% of the total budget unallocated, so they have the cash to pay for smaller one-time needs.

As you age, the people you love and care about are aging as well. One thing that you can expect to happen at unpredictable times, is that your lifelong friends and family will develop health issues. It could be a child that has a baby, an elderly parent who has a fall and needs some help while they recover, or an old friend gets a terminal illness. You don’t want money to be an obstacle that keeps you from being there in those situations.

Bank on the unexpected by creating wiggle room in your budget and having an emergency saving account for your retirement.

Regularly Review Your Budget

Making a budget isn’t a one-and-done effort. You will need to review it regularly. Look for spending that is no longer serving your needs.

For instance, that streaming service that had a couple of series you wanted to see and a bunch of good movies might no longer have those series or good movies you haven’t seen or it might be that a different service will now suit you better or offers a better price.

It could be that what was once a one-time expense, like flying down to Florida when your father fell, has turned into a more regular event. If you are now flying down to Florida once a month to check on him, you should add that as a regular budget item rather than taking it out of the “shit happens” money.

For the most part, doing a review once a year is recommended by retirement specialists. With inflation running so high, it might be more prudent to do it twice a year.

Once you have reviewed your budget, then you can review your portfolio and plan to generate the cash needed to cover your budget.

Focus on What is Most Important to You

Before retirement, most people are more constrained on time than on money. After retirement, this reverses. There is a lot less constraint on time and more on money. So make sure that you spend your money in a way that is most efficient for you. Get the most enjoyment out of your money.

Since you will have the time, explore how you will want to fill your time. If you haven’t traveled a lot, take a package tour to see if you like it. Visit with relatives. Go to Florida if you like the sun and beaches. Go to New Mexico or Arizona if you like deserts or mountains.

A lot of retirees like to devote time to their hobbies. They have the time to go golfing, go to casinos, maintain collections, work on old cars, etc. Is your hobby going to be expensive? If so, is it worth it? Fortunately, while a lot of hobbies are expensive, some can actually produce a little revenue. I have a friend who likes to buy rust buckets and transform them into working vehicles which he then sells on Craigslist. There is plenty of time for hunting through garage sales for those rare valuable items. I like to write, so here I am. What will you want to do? Will it cost money or make money?

Pets can be a great option for retirees. They can take up a lot of your time and provide constant companionship, especially if you are single. If you are traveling, it can be quite expensive to board them. But again, it is a matter of spending money in a way that brings you the most joy. If you enjoy traveling and do it a lot, then a pet might not be a good expense. If you enjoy your pet and travel to places where you can bring your pet (many hotels will let you bring small pets with a cleaning deposit), then that will work as well.

Where will you live? Many retirees build their “dream home”, and then discover that they don’t actually use thousands of square feet of space. What was a “dream” when they were working and had a house full of kids can feel very empty when the kids move on with their lives. Downsizing can be a great way to reduce expenses and have a space that is easier to maintain. Some retirees like to move to areas with a lower cost of living or even move to another country. Others can’t imagine leaving their “home town”. No decision is “right” or “wrong”, but these decisions will have a major impact on your expenses in retirement.

The key is, that you want to have an idea of what your day-to-day life will look like. Your preferred lifestyle will have an enormous impact on how much income you need.

You Still Need to Save For the Future

A lot of people underestimate how long retirement can be. When you are 30, 65 sounds “old.” When you are 65, you might have another 40 years of life to live and fund. The last thing you want is to outlive your retirement.

You still have a future, you will still have financial needs in that future. So when you retire, don’t forget to include a plan to reinvest a portion of your income. Through reinvesting, you ensure that your income will grow every year. Helping you keep pace with inflation, and ensuring that your retirement will never run out.

Conclusion

If you’re reading this, then you have already decided to manage your own retirement portfolio. That is usually an indication that you enjoy it, or are at least interested. I think managing a portfolio is fun. It’s a hobby that can make money, can fill a ton of time, and can make your retirement more fulfilling. So it is something we love to think about, talk about, and debate about.

Budgeting isn’t so entertaining. Nobody really wants a budget. Wouldn’t it be grand to just have infinite money and never have to worry about the budget? The reality is that we should plan our budgets with the same diligence we put towards our portfolios. It isn’t as fun, but it is necessary.

Spend money wisely and to your best benefit. You don’t have to make anyone other than your spouse happy with your retirement spending, so make sure you are spending money on the things you enjoy or that benefit you.

Make sure you are prepared for the expenses of retirement. No one enjoys paying for health insurance, but making sure you have good coverage will benefit you. Prioritize maintaining an emergency fund. Ensure you are still setting aside for the future.

Regularly review what you are spending your time and money on. Make sure they give you the same level of enjoyment they have in the past. If they don’t, look to spend your money elsewhere (or just stop that spending).

Once you have a preliminary retirement budget (or have finished your regular budget review), you then know where you are going and can build your income portfolio to achieve that goal.