While investment returns are important, cash flow is the #1 driver of a retirement plan’s sustainability. If you are approaching retirement, these steps may help you understand the risks of underestimating your retirement expenses.

Understanding your Retirement Lifestyle

A lot of pre-retirees assume that retirement expenses will be lower once they retire. In reality, unexpected expenses can negatively impact a retirement budget. Hobbies and traveling are often a much larger portion of the retirement budget, as more free time leads to a more active lifestyle. You may also want to contribute more charitably or help out grandchildren, but often assets used for these purposes are not allocated before retirement.

Another common pitfall is forgetting to add expenses that are currently covered by an employer or your small business. Car allowances, cell phone bills, fuel, travel expenditures, medical premiums, dental costs, and dining are often overlooked. It is important to think not only of your current lifestyle, but to envision what retirement means to you.

Underestimating Unexpected Expenses

Another important factor to consider before retiring is how unexpected expenses will be handled in retirement (e.g., a new car purchase, home improvements, health expenditures, etc.).

Before retirement, when an unexpected expense occurs, you usually have time to build your investments or cash back up and recuperate. In retirement, it can add stress to your plan and your investment portfolio because you don’t have the inflow of income to recover as easily. Poor market performance can make unexpected expenses even more challenging because you could be forced to sell from an investment account at an inopportune time.

The Impact of Underestimating

Underestimating your expenses can have a material effect on your financial plan. For every $5,000 per year you underestimate, you will need an additional $100,000– 175,000 of assets to cover the oversight. This assumes you are using a 3–5% withdrawal rate from your portfolio.

Steps to Consider Before you Retire

Pre-Retirement Cash Flow Analysis

Prior to retirement, you should go through an exercise where you evaluate your cash flow. The best way of doing that is by looking at your prior year’s expenses to see what might be added to your current expenses based on employee benefits and your retirement lifestyle goals.

Janney’s My Net Worth tool can help develop accurate projections by providing your entire financial picture in one comprehensive view.

Pre-Retirement Budget Stress Test

Budgeting can be helpful, but it can be an arduous process. If you’re thinking “This isn’t for me,” I would encourage you to stress-test your budget. The best way to do this is by putting an estimated budget amount in your checking account on the first of the month and seeing if you need to add money to your account before the end of the month. Continue this test for at least three months. Many find that their expenses are higher than normal during the holidays, so keep those months in mind. If you’re adding money to your checking account consistently, it is safe to say you’re underestimating your monthly expenses and should reevaluate your retirement income goal.

Plan for the Unexpected

Make sure you have enough cash on hand to comfortably handle future lump sum expenses. If it’s not possible to build up your cash reserves, consider leaving some cash on the sidelines in your investment account or taking out a home equity line of credit as a backup before retirement as an alternative.

For example, margin or securities-based lending are two solutions for considerations which can provide cash flow flexibility for those who experience unexpected expenses.

Finally, have a plan for long-term care expenditures. Even if you have a sound, realistic monthly budget and a plan for unexpected expenditures, long-term care expenses can add up quickly.

Janney's My Net Worth Tool

Our My Net Worth online budgeting tool is available to any Janney client. It can help you track your savings and spending on all of your financial accounts. You can set savings goals and track your budget with this easy-to-use online tool. My Net Worth can also be the first step toward a retirement income evaluation or financial plan provided by us.

Working With Janney

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.

Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within.


Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

About the author

Jack Cintorino

Vice President & Senior Financial Planner

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