The fundamental issue about retirement budgeting is what we call “the denominator effect”. How many years will you live.
If your retirement pool of liquid assets (bank balances, annuities, dividends, etc) is generating annual income of $100,000, and you spend $50,000 a year, then your money will run out in 2 years. If your denominator is 3 years, then you have an issue. This is the cash flow scenario.
The other scenario is the capital scenario. If you own your own house, and also have marketable investments (stocks, bonds, etc), then your denominator is less important – IF you are prepared to cash some of them in to bolster your cash flows. If, on the other hand, you refuse to liquidate them so that you can leave them to the family (your estate), then you really do have an issue.
There is no clear best approach on this. The only clear issue is that we are all in the same place with the quandary. Do I see out the rest of my years doing what I want to do and spend as I want to, or do I watch the pennies and leave the money to the kids so they can blow it…? Ideally we aim to do both.
There is no doubt that for those of us in the latter stages of life, our expenses generally are less, so the critical aspect of this decision is to make sure that you don’t deny yourself the basic needs of life (accommodation, food, heating, etc) but then also add some fun money on top. If you can cover those costs through existing cash flows without having to dip into the capital pool you will be fine.
If you are approaching retirement, or if you are in early retirement with still some work-related cash inflows, then consider using the DRIP programmes from most large public companies. Dividend Reinvestment Programmes – where instead of taking their quarterly/annual dividends in cash, you take the dividend in more of their shares. Because you don’t need the cash today, you are merely adding to your share count, so that when do need the cash, your dividend income will be based on a higher number of shares. It’s a simple and painless way to increase your cash flows down the line.
There was a very good article in the UK’s online Daily Mail saying how many over-65s in the UK are still in some form of employment because of low pension incomes. The social impact of that for the retirees is of course whether their health and happiness is being affected by their need to keep working. If it is just a top-up and they enjoy the work, then fine, but if they have no option but to work, then the psychological impact can be heavy.
As we move through this Money series on Olderhood.com we will develop other aspects of the retirement plan and will share with you the stories of others around the world, who, for one reason or another, are in the same place as you are.
You are not alone. / Contributed by Bill Storie, Bermuda.