Spending

Getting ready for retirement involves more than just calculating how much you will need and the rate you can draw down your savings. The year before you retire is a crucial time to prepare both financially and psychologically.

Often, I feel that many retirees underestimate their expenses, get bored without a daily grind and panic over market corrections.

Here are a few exercises that you can take during that last year of working life to get ready for the reality of retirement.

As an advisor, I sometimes need to play marriage counselor. Money differences are one of the biggest sources of marital discord. Recently, I resolved a key disagreement that divided a couple. The answer: Let each spouse have his and her own bank account.

The couple – let’s call them John and Jane Bickerson – is nearing retirement, and sat down with me to look at their cash flow needs, possible dates to quit working and the ever-present question, “Do we have enough?”

The most important retirement planning task for your last working year is calculating where your income comes from when you retire. This probably seems completely obvious, but it usually isn’t. Your portfolio needs to yield more every year to keep up with inflation.

When you save for retirement, the ugly truth is that you also need to keep your spending at a sustainable rate. Decreasing your standard of living is hard, in retirement or when working. But it’s easier if you control your consumption now.

Longevity is a blessing and many of us are living longer. Unfortunately, this makes retirement planning much more complicated. In retirement, you may be wiser to take out less money from your savings than you planned.

A younger spouse dies and leaves an individual retirement account to an older partner. If the deceased person received money from the IRA, you as the survivor-spouse can make moves to enhance the benefit for yourself.

For the payments, known as required minimum distributions (RMDs), the survivor-spouse – who is the sole beneficiary of the IRA – has two options, regardless of age:

Knowing how much you should save for retirement is critical. But what if you are late getting started? The longer you delay, the shorter the time that compound interest can do its magic on your savings.

 
A good piece of advice: Save almost all of any sudden windfall. Surprisingly, studies show that such windfalls can actually impoverish you. They make you feel rich, which inevitably leads to overspending. But wealth is what you save, not what you spend.
 
With large windfalls, people tend to spend about 40% of the money. So if you get $20,000, you might spend $8,000. But if the amount is small, you will squander a greater percentage, often more than you received. Thus if you win $75, you may actually spend an additional $125 before you stop celebrating.
 

 
People’s illusions about money hurt them, whether believing they have plenty of time before worrying about saving, or that they can spend lots of money now on consumption because the future will take care of itself.
 

 
Do you have enough money to retire? You may think so. Odds are you are not on track to grow the assets you will need.
 
Fidelity recently announced a simple measure to gauge if you have enough money to retire. Instead of an amount, it simply says that you need at least eight times your ending salary in order to cover your retirement expenses to age 92.