Retirement: Time to spend wisely

With retirement, you're dealing with a phase of your financial life where you have a limited amount of money and no concrete idea of how long it must last. With finite resources, you must be mindful of your spending so you won't outlive your money and so you'll have the funds for the things most important to you.

"By the time people are ready to retire, or have already retired, they should have a very current picture of what their spending is," says Tim Kober, a certified financial planner with Cedar Financial Advisors in Portland, Ore. "There's the problem of spending going up in the initial part of retirement when people do all the deferred things that they've been wanting to, and it's important that they don't overdraw their nest egg to make all those nice things happen."

Retirement has many stages, and not every stage is one where you'll want to splurge. But it's important to realize that you may spend more initially, and budget accordingly. As you get things like the travel bug out of your system, spending may go down. But other expenses, like health care, may increase.

Time to Face Realty

A potentially emotional decision about retirement expenses is a possible need to downsize your housing, says Kober. Although adult children may be emotionally attached to the old homestead, "you may need to have the brutal, honest conversation with your family and say, 'This isn't a long-run sustainable housing situation.' You can reduce your housing costs and spend more time and money on leisure activities."

Gordon J. Bernhardt, CPA, a financial planner with Bernhardt Wealth Management in McLean, Va., agrees. Many consumers bought too much house or spent too much money on rental properties during the real estate boom and now may face a cash flow problem in retirement. "Is the individual overextended? Did he or she buy too much real estate and is facing the consequences of negative cash flows? In the cases we have seen, that individual is still above water, but selling the property will help their cash flow."

But remember there are a number of costs involved in moving, including real estate commissions and potentially higher property taxes. Also, according to Bankrate's 2010 Closing Costs Survey, average closing costs on a $200,000 home were $3,741.

Do Expense Accounting

Experts say one golden rule of retirement should be "Plan what you spend, spend what you plan." "Too many people don't have a budget," says Michael Kay, a certified financial planner who's president of Financial Focus in Livingston, N.J. "You need to know which costs are fixed costs, and which costs are discretionary. It's the discretionary costs that you choose, that you can trim."
Before you can cut your discretionary spending, you have to know how much it is. So keep track on what you're spending for frills like entertainment, travel or impulse purchases.

Dining out is one place to put your budget on a diet, says Bernhardt. "Our clients have shared that they did not realize how much money they spent on eating out until they changed their habits and ate at home more often," he says. "And they did not feel like they were making a significant sacrifice."

Be present-minded

Grandparents and parents, naturally, want to lend a financial hand to their descendants. But it's not a good idea if it imperils your ability to stay financially solvent in retirement. Take a hard look at any outright cash gifts that you are giving, or expenses like private school tuition or summer camps that you're covering.

"Some of our older clients have reduced their annual gifting to reduce the withdrawal rate from their portfolios," says Bernhardt. "It's nice to be able to help out the grandkids, but you don't want to risk running out of money."

Go to the Goals

Whether you're already retired, or about to be, you need to periodically re-evaluate your personal spending goals. "You start with your core beliefs, what's important to you, and then you take a look at your financial reality," says Kay. "Then you may have to say, 'OK, do I need to make changes in my discretionary spending or do I need to make structural changes, like in where I'm living?'

"Some people might say, 'It's really important for me to live near my grandchild, and I'm willing to give up some discretionary spending to do that,'" Kay says. Others might conclude that some cuts in structural expenses are worth it in order to send a grandchild to summer camp.

The bottom line, Kay says, is that you must have a game plan to achieve your goals.

Drive a Bargain

After housing, cars are one of a consumer's biggest expenses. "People don't think about operating costs and the total costs of owning a car, including repairs, insurance and maintenance," Kober says.

Kober notes that couples can save money by cutting back to one vehicle. Also, retirees might employ other creative strategies like renting a cheap car for long trips instead of putting more wear and tear on their own set of wheels.