Why your retirement budget should include ongoing savings

25 Nov
ceramic piggy bank
Feed me, feed me

If you listen to the experts they will tell you that because expenses are lower and you no longer need to save, you can live on less in retirement.

About that saving thing … sure you are no longer saving for retirement, but that does not mean you no longer need an emergency fund with the ability to replenish it as needed. In other words, save again.

Here is my true story. Earlier this year my wife’s medical problems resulted in $1,000 in out-of-pocket costs. A few months ago I backed into a mailbox ripping the mirror off my car. That clearly was not planned, nor was my stupidity but it cost me $700 (yup, for the motor in a side mirror). My wife’s car needed new brakes, $430 and yes, that can be expected, unwelcome but routine. Here is the kicker and one I can legitimately claim as unanticipated. The famous October snow storm in the northeast devastated trees in my yard to the tune of $4,000 to get them trimmed and broken branches removed.

Let’s see, that is $6,130 in unanticipated, not budgeted expenses in the first ten months of my second year of retirement.  What to do, what to do?

Well, I’m lucky I do have savings to pay for this and when planning for retirement I budgeted ongoing savings for just such situations. I didn’t listen to the experts on this one. I am also lucky because I have a pension and do not rely on the accumulation of assets such as with a 401(k) plan. That is not typical.

What if I was relying on my 401(k) plan withdrawing at a certain rate for living expenses, but now I suddenly had to use an additional $6,000 in my second year of retirement. That snowstorm and my bad driving just put my future income stream at risk because depletion of my pool of money is accelerated. I may run out of money before I run out.

Assume you were earning $70,000 a year while working and you diligently figured that to cover all your expenses in retirement you need $65,000 (ignore taxes for this illustration).   An unexpected large expense throws your plans in a tizzy.   Let’s say you do have a pension, but no savings.  An unexpected expense probably means you whip out the credit card or otherwise take a loan. Either way your expenses have gone up and your living standard on your fixed income has gone down.

I hope there is a lesson here. Your retirement budget must include some ongoing savings. If you don’t need them,  great.  After a few years you’ll have extra money for a nice vacation. If you do have an emergency, it won’t impact your living standard.

Tags: 401(k), Out-of-pocket expenses, Pension, Retirement, Saving, saving for retirement, Standard of living

2 Responses to “Why your retirement budget should include ongoing savings”

  1. Doug November 26, 2011 at 6:38 AM #

    Excellent points. Remember most pensions (if you are lucky to get one today) normally don’t rise with inflation. SS has not had a cost of living increase in 3 years. Most 401k’s and other investments have taken a dramatic hit in the last 2+ years. Interest on savings and money markets is so low it is ridiculous. Just look at the increase in Medical insurance. Inflation has risen, so even with saving during retirement we elderly continue to fall behind. Save as much as possible even during retirement.

  2. bill November 25, 2011 at 11:09 AM #

    Let me say Amen! – Now project a 10 year wait and see what our illustrious government does to your fixed income calculations. That $700 mirror and that $430 brake job will have your tin-lizzy up on blocks on the front lawn ’cause the mechanics will want their “fair share” of those big corporate profits. Those current dollar costs mentioned above will seem like today’s “Black Friday” bargains.

    Retirement actually mean what it says – start planning to retire those pleasantries of life soon after you retire so you can afford necessities later in life. No amount of savings in retirement will keep you ahead of the rising costs. I recently paid over $900 for 4 tires on one of my cars – remember when they used to cost $35 a piece? Been to a doctor or a hospital recently and see what they are charging?

    Start planning and retiring items as part of your planning.


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