You’ve been doing the right thing for decades—saving for retirement and being financially responsible—all toward a good end. You’ll visit the grandkids more often, take that trip to Asia, everything you’ve been looking forward to for years.
But what about today? Is it possible to spend a little more freely now without throwing your future plans off track?
“It may be,” says Rob Williams, managing director of financial planning with the Schwab Center for Financial Research. “Remember that your money is ultimately meant to be spent.”
As long as you do a few calculations to gauge what you’ll need for the future, you might be able to enjoy more of your money sooner. These four steps will help you plan ahead.
Step 1: Think spending plan, not budget
To many people, the term “budget” implies what you can’t have. But the emphasis here is the opposite, Rob says. “Your spending plan tells you what luxuries you can afford.” Planning your expenditures seems less tedious when you focus on getting what you want.
Start by writing down and adding up your monthly outlays for necessities like your mortgage, utilities, basic groceries, insurance, taxes. Though it’s not always easy to distinguish needs from wants, try to figure out a monthly average for your truly essential expenditures. Then, looking through a year of bank and credit card statements, do the same for your discretionary expenditures—gifts, vacations, entertainment—any purchases you didn’t have to make.
Separating essential from discretionary spending allows you to reflect on how the spending choices you make affect your quality of life—and to identify any areas you’d like to change. Your basic living expenses should remain fairly predictable, but how (and how much) you use discretionary funds is ultimately up to you.
Step 2: Do a retirement projection
Retirement income typically consists of three things: Social Security, company pensions or retirement plans, and the income or sales proceeds generated by your investments. Start by finding out how much you (and your spouse, if you’re married) are likely to receive from Social Security, pensions and retirement accounts. Then compare that amount to your current total monthly expenses. The Social Security Administration offers a retirement estimator on its website, and your employer or retirement plan administrator may do the same.
For example, if you currently spend $8,000 a month and expect $4,000 from Social Security and pensions, your monthly gap in income amounts to $4,000 a month, or $48,000 a year, assuming your retirement lifestyle will mirror your current one. Will your savings be sufficient to cover that gap?
One rule of thumb is to multiply your gap—in this case, the $48,000 annually—by 25, which amounts to $1.2 million. If you’ve already saved that amount or are easily on track to do so, you should be in good shape. But if it looks like you’ll have a shortfall, consider adjusting your current retirement contributions to fill the gap before thinking about any additional discretionary spending.
You can also explore how much you need to save—and whether changes might be in order—with the Schwab retirement calculator.
Step 3: If you’re ahead of the curve, focus on happiness now
If you already have enough savings to pay for your future retirement, or you are definitely on track, you should feel comfortable spending more money sooner. You may even be able to redirect some of your retirement contributions. (Be careful not to overlook other long-term saving needs. You may want to check on college funds, too, for instance.)
These are personal decisions, Rob notes, but running the numbers as you did above could help you to identify a spending comfort zone—in other words, a sense of surplus you can use to enrich your life right now.
Now comes the fun part. What have you always wanted to do before retirement? You can safely use the “newly discovered” cash to make your dreams come true—or make up new ones that suit who you are now.
These aren’t just splurges; you might even view them as investments of a kind, because not all discretionary expenses provide equal returns. It’s one thing to commit $10,000 or $20,000 a year to taking great vacations, but what about exploring new skills or bringing the family together? Such experiences can pay different types of personal dividends.
If you’ve always wanted to buy a second home, a boat or a Corvette Stingray, however, be sure to consider unforeseen expenses they might incur. Purchases that come with ongoing costs like a mortgage, property taxes, slip fees, maintenance, insurance and so on could become more burdensome than beneficial. So before you go out on that limb, plug the full cost into your spending plan to ensure that it stays intact. If you’re still on solid ground, go for it.
Step 4: Revisit your plan annually
Life can be complicated, and over the course of the years, many things could affect your plans. A record year in the stock market could leave you with way more income than you expected. Or suppose your child gets married or has a baby—you’ll probably want to spend more than you anticipated.
Whatever happens, it’s a good idea to revisit your spending plan and projections once a year to make sure you’re on track. “Balancing your future goals with the need to live in the here and now is an ongoing process, not a one-time event,” Rob explains.
Naturally, if you are on course, the reassessment process is mainly an opportunity for you to plan how to spend your discretionary cash. It might be more painless than you expect. If you’re married, make it an annual date night. It might even turn out to be one of your favorite nights of the year.
What you can do next
- Reconsider your saving and spending with an eye to the present as well as the future.
- Talk to a Schwab Financial Consultant about how to keep your plan on track—while still getting more for your money today.