In 7 Signs You're Spending Too Little in Retirement , we explored signs that you're spending too little in retirement. We have learned that it is not important not to spend enough. The bigger problem, of course, is spending too much, as most of the money cannot be recovered.
How to tell if you're spending more than your savings can support? If any of these five signs describe you, it's time to make some changes.
1. You do not know how much you should spend.
If you do not have a budget, you are probably spending too much. The Center for Retirement Research at Boston College found that 53% of households are at risk of being more than 10% below their retirement goal, and more than 40% of retirees may run out of money for basic needs. Other statistics show that more than two-thirds of Americans don't use a budget.
"A budget serves as a roadmap for total spending during a particular week, month, or year. A lot of times we're not aware of how much money we're spending in a given month, so a budget is really an accountability tool to make sure we're living within our means", Says Mark Hebner, founder and president of Index Fund Advisors, Inc. ., in Irvine, Calif.
If you don't follow a disciplined spending plan, start today. Reading Budgeting Basics will help you.
2. You spend more than 6% of your savings per year.
How much you should spend after retirement depends on many factors, but retirement experts say it's not advisable to spend more than 4% to 6% of your savings each year. If you have $750, 000 saved, a 5% payout rate would give you $37, 500 per year plus Social Security benefits. If you want to be safer, go with the traditional guideline of 4%.
3. You are paying too much to service your debts.
Recent data from the Bureau of Labor Statistics found that the average retiree spends 31% of their income on a house payment. That works out to about $13,833 per year, assuming an average income of $44,713. (And that's just the house payment.)
Experts advise no more than 36% debt-to-income ratio. (Also read Too much debt for a mortgage? ) Debt hurts you in two ways. First, interest drives up the cost of the item, and second, you use money that could stay invested to service the debt. The more money invested, the more your accounts will continue to grow. This is even more important since you no longer take home a salary.
4. They show evidence of a "loose" Mindset.
You spent decades working more than full time, supporting a family, paying into Social Security, and delaying the fun things that come with a comfortable salary.Now you've reached retirement and it's time to do all the things you've always dreamed of doing.
This is true, but not all at once. Rewarding your first year by buying a Corvette, taking a vacation around the world and buying a summer home will give you a few years of comfortable living. Spread these purchases out over time as they fit into the budget.
"Financial planning in general focuses on the long game. Retirees should not only take the long view of the investment process, but also make the most of their retirement savings. Spending all your savings in the early years of retirement is a recipe for complete disaster", says Hebner.
5. You are not supporting your excess spending with a side job.
If you don't have enough saved to retire – or you discover that your desire for adventure costs more than your budget can support – you can fill your gap by supporting your expenses. Even a part-time job that brings in $15, 000 per year will allow you to spend much more than the limitations of your retirement budget may allow. Don't fall into the trap of spending without a plan to grow your retirement income if you find you're falling short.