Retiring Wise Blog

Test Your Retirement Plan

Written By: Lauren Russell

Would you ride a roller coaster that’s never had a test run? Then why would you approach retirement this way?

The purpose of test runs is to receive feedback, to ensure safety, and to make sure everything is running as it should. Testing your retirement plan is no different. By having a practice run, you’ll be able to spot any holes in the plan, figure out about how much money you’ll need, make sure you’ll be able to live safely on a specific budget and make sure the assets you have available will work according to plan.

Here are a few tips for giving your plan a test run before you actually retire.

See What It’s Like Without a Job

Before you put your two weeks in, let us say this first. We are not telling you to quit your job. What we are recommending is to consider how much free time you will have without a job. Think about your schedule. When will you have this additional free time? And how much free time will you have? If you work 40 hours each week, what will you do with 40 extra hours each week when you retire? If you are used to working at night, what evening or night activities can you do to fill your new-found time off? Will you change your sleep schedule and enjoy the daytime?

What does your schedule look like now, at this moment? What will it look like when you retire?

If you have vacation days saved up, maybe consider taking a few days off to see how it feels with no work requirements. Are you bored? Are you going stir crazy? Does it feel like you lack purpose? These feelings may encourage you to plan a second career, work part-time, or volunteer during your retirement.

Determine How Much Money You’ll Need Each Month

Investigate your spending the last few months and calculate the average amount spent within that time frame. It is typically said that your annual expenses in retirement will be about 70-90% of your pre-retirement income. That means, if you’re making $100,000 a year, expect your annual expenses in retirement to be $70,000-$90,000. To figure out how much you’ll need each month, divide that number by 12. In the example above, you’ll need about $5,833-$7,500 each month.

However, according to an article from AARP, it is wise to expect expenses to be at least 100% of your pre-retirement income. And this should be the expectation for at least the first 10 years of retirement, according to the article.

Test the Results

If you are already living below the estimated monthly expenses, then you may already find success with this estimate. However, if your monthly expenses are currently more than this estimate, we suggest taking a look at your expenses and spending and see if there are places to rework. If possible, try living within the expected living expenses for a month or two to see how life may be. If it’s impossible, it’s time to start saving more money for your retirement.

Create a Retirement Budget

Based on your determined living expenses, you’ll be able to create a monthly budget for retirement. If you already budget your money, chances are your retirement budget will look very similar to this budget. If you plan on traveling more or taking up a hobby when you retire, add in those expenses. And since medical needs may rise as you get older, we also recommend giving your “medical needs” category a boost.

If you do not currently budget your money, we recommend starting to right away. Talk to your financial advisor for help or visit our blog post on what to include in a budget for ideas. Once you get used to living on a budget, then you can think about making one in retirement and plan ahead.

Once you create your monthly budget for retirement, give it a try for a month or two. Are you finding categories that need more money allocated to them? Are there places in the budget that don’t require as much money? Are there categories you could remove completely? Is it hard to live on this budget? If so, you may need to start saving more money now or find a way to supplement your income in retirement. That could mean taking on a part-time job or getting a reverse mortgage.

Using a Reverse Mortgage in Retirement

Whether you find that your retirement plan needs some work or is on the right track, you may want to consider a reverse mortgage. The loan can enhance your plan or fill in some holes, depending on your situation.

If you tested your plan and it passed with flying colors, you could use a reverse mortgage line of credit to provide extra security. The line of credit gives you access to money when you need it, so you could choose only to use it if and when you need it. Keep it as an emergency fund for unexpected expenses that don’t fit into your budget. Any available funds in the line will grow in value over time, providing access to more money in the future.

If you tested your plan and found that it needs some work, a reverse mortgage could be a great solution. If you do not think you’ll have enough money to afford all of your living expenses each month, the proceeds from the loan could provide that extra cushion. The reverse mortgage pays off your existing mortgage, and no monthly payment is required. This can save you money each month. You still need to pay your property taxes and homeowners insurance and maintain the home. You could use the money to live on now and leave your other retirement assets alone. By doing this, your assets have more time to grow in value, providing access to more money later when you finally do retire.

When it comes to retirement planning, especially your finances, it is important to consult a financial advisor.

Ready to take the next step? Now is the perfect time!

Call to speak with a licensed specialist (800) 401-8114

Putting Your Retirement Plan to the Test