Building Your Full Retirement Decumulation Budget

Decumulation is complicated. No one knows how long they’re going to live, and as medical science advances, people are living longer than ever. It’s very possible—nay, likely!—that you could live in retirement for thirty years. You need a strategy that plans for the longest horizon, and for all of the lifestyle changes that could occur in that thirty years. We'll outline the key considerations and risks here.

Adam Cecil

Published October 13th, 2021

Table of Contents

Key Takeaways

  • Decumulation planning requires determining your income needs every year through retirement.
  • The process is difficult to navigate because there are so many unknowns to plan around.
  • Understanding what kind of lifestyle you want, and can afford, in retirement is a great starting point.

Here’s a question for you: how much money do you need every month to live on? For most of our lives, the answer is determined by how much income we bring in. When you’re retired, however, you have to make your own paycheck. On top of that, your budget is in flux: you’re likely spending less on things like meals out and business casual clothing and more on vacations and healthcare costs.

Plus, you don’t want to overextend yourself—while Social Security benefits will last until you die, they likely won’t cover your full expenses, and you’ll need to strategically draw down your investments and other savings to cover the gap. This is what we call a decumulation strategy. As you might’ve guessed, it’s the opposite of the accumulation strategy of saving income in retirement accounts.

Decumulation is also a lot more complicated. No one knows how long they’re going to live, and as medical science advances, people are living longer than ever. It’s very possible—nay, likely!—that you could live in retirement for thirty years. You need a strategy that plans for the longest horizon, and for all of the lifestyle changes that could occur in that thirty years.

What kind of lifestyle changes should you expect? Typically, we see three phases of retirement. The first phase comes right after retirement. Spending goes up as retirees go on more vacations and buy big-ticket items like cars, boats, or homes. Even if you’re not spending on big items, your budget is likely to be in some flux as you try to settle into what post-work life looks like and you explore new hobbies.

The second phase is marked by a decrease in spending as you slow down a little bit and settle into retired life. Then, there is usually a third phase where healthcare costs start going up. And while these are the big changes you can expect, you should expect lots of smaller ups and down in spending, similar to what you’re experiencing now.

So how do you actually go about setting your retirement decumulation budget?

It’s helpful to start with laying out your actual monthly expenses. There are two ways that we recommend finding that topline number:

Go Through Line By Line

The most precise way to set your retirement budget is go through item by item on every expense to see what you’re currently spending. This can be super helpful if you don’t already have a budget, or have some amount of credit card or other float as part of your current spending habits. This can also be helpful if you expect some larger changes in your expenses. For example, if you have a lot of expenses related to work that will no longer be relevant, it can be helpful to separate all of those out.

The major downside to this approach is that it takes a lot of time. If you’re still a good amount of time away from retirement—a few months or years—it could be helpful to start tracking these expenses now, so you’ll be ready when the time comes to flip the switch.

Bucket Your Expenses

An easier way to go about budgeting is to split your expenses into two major categories, fixed and discretionary expenses. This approach helps you answer a very important question: what is the absolute bare minimum amount I need every month to cover my most important expenses?

Fixed expenses include things like your housing costs (mortgage or rent, as well as a budget for repairs or unexpected expenses), your groceries, Medicare and baseline healthcare costs, vehicle maintenance and fuel, other insurance policies, and other bills that absolutely must be paid every month.

Discretionary expenses are things that you could skip out if you had to. For example, bigger vacations, eating out, entertainment services, and expenses related to hobbies.

As discretionary expenses will fluctuate, this approach helps give you peace of mind that you’ll always have enough to cover your most important expenses.

Next Steps for your Retirement Budget

No matter which approach you take, the most important thing is to ensure that you’re giving yourself a retirement paycheck that can cover your fixed expenses. Ideally, fixed expenses can be covered by guaranteed income, such as Social Security or pension payments. This is one reason why it can be helpful to delay retirement until age 70, as your Social Security monthly benefit will increase every year you wait to take benefits up until you hit 70. Then, in an ideal world, your discretionary expenses can be covered by your investment assets in 401(k)s or IRAs.

Setting your budget is not a one-time act—you should be reviewing your expenses annually, along with the rest of your decumulation strategy, as you adjust for a changing retirement lifestyle.

Luckily, help with all of this is just a few clicks away. Talk to a Certified Financial Planner from Retirable today to work on your decumulation strategy, your budget, and your overall retirement plan. They’ll help ensure that you never run out of the money you need to live the retirement you deserve.

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Adam Cecil

Writer, video maker, and podcast producer based in Brooklyn. Previously a staff writer at Policygenius, helping people find the insurance coverage they need. Find out more.

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