Many pre-retirees and retirees make serious mistakes regarding their retirement income and spending for living expenses. This is very understandable, since building sources of lifetime retirement income can be complicated and beyond someone’s skill set. Preparing retirement budgets can also be time consuming and frustrating.

As a result, either you might spend too much, which increases your chance of running out money, or you’re very cautious and might spend less than you could have and miss out on fully enjoying your retirement.

Let’s look at seven spending mistakes you might make and some strategies to address them. First, however, let’s look at a big general mistake to avoid.

Don’t Make This Big Retirement Spending Mistake

 The biggest mistake is not preparing a retirement spending plan as you transition into retirement and instead “winging it,” hoping everything will be OK. Well, hope is not a good plan!

An effective retirement spending plan would balance the common-sense formula for retirement security:

• I > E, or retirement income greater than living expenses

To help ensure that your income is greater than your expenses, you’ll want to build sources of retirement paychecks that last the rest of your life, no matter how long you live, and are sufficient to pay for your living expenses. Retirement income sources include: 

• income from Social Security,
• pensions if you have one,
• guaranteed lifetime annuities from an insurance company, and
• bond ladders that are designed to last for the rest of your life.
•  

If you spend no more than your monthly lifetime retirement paychecks, you have a very good chance of making your money last for the rest of your life.

An important part of your retirement spending plan is to prepare a budget for your living expenses throughout retirement. You’ll want to consider how your living expenses might change after you retire. Also, you’ll want to separately itemize your “must have” living expenses and your “nice to have” expenses so you’ll know which expenses are essential and which can be eliminated or reduced if necessary. You don’t need to budget down to the last penny—just come close enough, so you can more easily adjust your spending to balance your spending.

Next, let’s look at five mistakes that involve spending too much in retirement.

Spending Too Much In Retirement

One common retirement mistake is relying too much on part-time work to pay for your living expenses, assuming your income for work will last the rest of your life. The reality for most retirees is that someday you’ll be unable or unwilling to continue working.

Instead, use part-time work strategically to enable you to postpone using other sources of lifetime income that increase if you delay starting them, such as Social Security, pensions, or annuities. Another possibility is to use income from part-time work to pay for nice-to-have living expenses that you could reduce if necessary.

Here are four more mistakes that involve spending too much:

• Little or no margin in your spending compared to your lifetime retirement income. It’s inevitable that you’ll experience spending surprises or that your spending might increase due to inflation. It’s important to build an emergency fund to address spending surprises.
• No formal plan for investing and withdrawing from your retirement savings, which can include withdrawing at too high of a rate. While there’s considerable debate among professionals about a safe spending rate from invested assets, spending more than 6% of your savings each year is a warning sign that you might be spending too much.
• No plan for having to increase your spending on medical care and long-term care in the last few years of your life. This s inevitable for most people due to frailty and health issues.
• Married couples who don’t plan ahead for the day when one spouse passes away. Usually, the survivor’s retirement income drops significantly, but their spending doesn’t drop very much.

Now let’s review two mistakes people make by being too frugal in retirement.

Spending Too Little In Retirement

One common mistake is being very cautious about spending from your retirement savings by withdrawing at a low rate that could be higher and would still be sustainable. Withdrawing less than 3% of your savings each year could be a sign that you might be able to safely spend more money. However, it’s definitely OK if spending cautiously helps you sleep better at night and still enjoy your life.

Another common mistake is forgoing travel and hobbies during your go-go years because you’re afraid of running out of money during your life. One strategy to address this mistake is to set aside a fun budget from your savings and not consider that budget as money you can spend when you’re building your portfolio of lifetime retirement paychecks.

As you can see, there’s a lot to consider when building a retirement income portfolio and avoiding common spending mistakes. If you’re at all concerned about your ability to handle this effectively, then it’s a good idea to work with a professional advisor who you trust to help you build a diversified portfolio of lifetime retirement income, including determining a safe spending rate from your retirement savings. It will help you relax and enjoy your retirement.