By Markham Hawkins, Vice President, Goldman Sachs Personal Financial Management
This is a question that I get all the time in my meetings with clients who are close to retirement, and people often want a straightforward answer. But from my 11 years as a financial planner, there’s not a cut-and-dry number.
That’s because every client’s situation is different, and depending on their financial circumstances, their spending will change throughout the course of a financial plan – sometimes dramatically.
Think about it: If you plan on retiring at the age of 65 and you run a financial plan out to age 95, that’s 30 years to plan for.
Now, try going back to yourself at 30 years old and ask yourself what your finances will look like when you’re 60. Your answer would probably be way off base.
Trying to predict your future spending is an extremely difficult thing to do. We could make assumptions on things like inflation and market performance, but there’s more to it.
In this article, I’ll go over a few approaches that I like to take to help my clients figure out their retirement spending question. Hopefully, my insights will help you make the most out of your next visit with your own financial planner.
The first step I’d like to take to answering the retirement spending question is figuring out how much you’re spending now.
For this, you could use the expense questionnaire method. An expense questionnaire is a spreadsheet with a line item for every possible expense you can think of. This method might work for some people, but I prefer using the pay-stub method, which I believe can be a more straightforward approach.
Your pay stub can tell you a lot about how much you’re currently spending (and how much you might spend in the future).
When I look at a client’s paycheck, their take-home pay gives me a fairly good idea of what is left for them to spend after retirement contributions, benefits and taxes. In other words, I can get a general sense of their budget. (This is assuming you don’t have a substantial after-tax savings account elsewhere.)
To get a general idea of what your retirement could cost, I believe it helps to break down your potential retirement expenses into two categories: fixed living costs and spending goals in retirement. Let’s look at these in turn.
The first category includes your fixed living expenses. These are likely not to change much over your lifetime (but the costs may need to be adjusted for inflation). Living expenses may include things like food, gas and utilities – in short, the essentials that you’ll have to pay for throughout your retirement.
Now, figuring out your second category of expenses – your spending goals in retirement – can be challenging. Every retiree has different goals based on their own personal experiences, and for me, helping clients nail down their retirement goals is one of the most rewarding parts of being a financial planner.
At Goldman Sachs Personal Financial Management, we use an exercise called Honest Conversations® to help clients open up about their relationship with money and how they make financial decisions.
This exercise also gives financial planners an understanding of their clients’ motivations and priorities. Through Honest Conversations® with clients, I’ve heard various types of goals: Retirees want to upsize, downsize, move closer to family, travel, reduce taxes, plan for long-term care – you name it.
For many people, I believe that what they want to accomplish in retirement is achievable.
A key to success is knowing how to manage tradeoffs. And as a financial planner, I can help clients clearly define their goals, research the costs of those goals and come up with a plan to reach them.
United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC (“GS&Co.”) and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization. Advisory services are offered through United Capital Financial Advisers, LLC and brokerage services are offered through GS& Co., member FINRA/SIPC.
GS PFM makes recommendations based on the specific needs and circumstances of each client. Clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. Investing involves risk, and investments may lose value. There are no investment strategies that guarantee a profit or protect against loss.
GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances.
The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. The material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such. The information, data, analyses, and opinions contained herein include confidential and proprietary portfolio information of GS PFM, may not be copied or redistributed for noncommercial or personal purpose without GS PFM’s expressed permission.
All names, logos, and slogans identifying GS PFM or GS PFM’s products and services (including, without limitation, HonestConversations®, MoneyMind®, FinLife®, Financial Control Scorecard®, Live Richly., We Help You Live Richly., Helping People Live Richly®, One Best Financial Life®, Ideal Life Index®, GuideCenter®, InvestmentViewfinder., GS PFM Financial Life Management®, and Financial Years of Freedom.) are trademarks and service marks or registered trademarks and service marks of GS PFM or its affiliates in the United States and/or other countries.
Marcus by Goldman Sachs is a brand of Goldman Sachs Bank USA, which is an affiliate of United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management.