Whether you're taking bucket-list trips, learning new hobbies, visiting family, or meeting up with friends for relaxing midday lunches, your leisure time in retirement will likely become more fulfilling—and costly. A 2-week trip to Europe with your spouse could easily run 5 figures, for example, as might initiation fees at a private golf club. Even just eating out a few times a week at local restaurants could add a few hundred dollars a week to your food bill.
The sticker shock of leisure expenses in retirement can create anxiety even for investors with substantial savings, says Jermaine Edwards, a vice president and financial consultant at Fidelity. "The shift from saving to spending can be quite an emotional experience," Edwards says, "All your life, you had a paycheck coming in, and now you have to manage your savings to last throughout your retirement years."
But an overly cautious approach to post-retirement spending can potentially be a mistake, says Gina Gillespie, vice president and financial consultant at Fidelity. "I find that clients who don't do the things they hoped to do in early retirement out of fear, tend to have regrets about it later on," she says.
Both Edwards and Gillespie work with clients to create retirement spending plans that balance their leisure goals with a sustainable withdrawal rate that won't deplete their assets later on. They suggest weighing these 3 factors as you crunch the numbers.
1. Your personal definition of "essential"
To determine a retirement leisure budget, start by adding up your non-negotiable expenses, which typically include housing, food, insurance, health care, cell phone, and transportation. Also think about small, regular expenses that can add up, says Gillespie, as well as larger ones that are likely to crop up periodically. "When I sit down with my clients for their budget analysis, I poke holes. I might say, for example, ‘Are you sure you'll never need a new car?' or ‘I don't see any costs listed here for your pet,'" Gillespie says.
It's also important to be honest with yourself about what really feels essential to your retirement happiness, even if some of those costs aren't strictly in the non-negotiable category. "A retirement budget isn't just about keeping the lights on," says Gillespie. "If it's important to you, your budget should reflect that." You might feel that taking several cross-country trips per year to see your grandkids is an essential expense, for example, or having season tickets to the ballet. Also consider whether you might need or want to provide financial help to your children or grandchildren someday, especially with large costs like education, a down payment, or a wedding—and whether you're hoping to leave a legacy to your heirs.
2. Your expected post-retirement lifestyle
"Sometimes people forget how much of their day to day is taken up by work. When they stop working, they realize they need to replace that with activities so they're not sitting around the house all the time," says Gillespie. If you hope to be very active, especially in your early retirement years, your leisure budget should reflect that. Fidelity's research suggests if you plan an active lifestyle in retirement, you'll need to ratchet up your overall retirement budget by 15% compared with a less active lifestyle. "I find that clients often underestimate what they'll want to spend on travel, or new hobbies," says Gillespie.
Keep in mind that as you age, your leisure spending budget will likely shrink. According to US Bureau of Labor Statistics Consumer Expenditure Surveys, transportation, clothing, and entertainment spending all decline throughout retirement years—but health care costs generally rise.
Spouses should have an open discussion about how each hopes to spend their retirement, notes Edwards. "I recently asked a couple to paint their picture of what a successful retirement looks like for them," he recalls. "One spouse said that it would be getting out on the golf course 3 times a week. The other said they would be spending more time with their grandchildren and checking off travel destinations on their bucket list. This couple that has lived in the same house together for over 30 years—and it turned out they had a totally different vision of retirement."
3. Your predictable sources of income
Edwards suggests making a list of all your potential income sources in retirement, which might include withdrawals from retirement accounts such as IRAs, dividends and interest from your investment portfolio, income you might make from part-time work that you transitioned to in retirement, and payouts from a business, as well as predictable income sources like Social Security, pensions, rental income, and income annuities. Make sure to use after-tax estimates for any taxable sources of retirement income, Edwards notes.
In general, Fidelity suggests structuring your retirement income plan so that your essential expenses are covered by predictable sources of income. "I find that clients who have some amount of guaranteed income tend to be better spenders," says Gillespie. "Whereas those who are relying on the market tend to force themselves to cut back during periods of volatility, even if their plan accounts for shifts in market performance." If you think market volatility might compel you to sacrifice leisure spending, you may want to consider combining a diversified growth account with a fixed lifetime income annuity.
Planning for tradeoffs
If you find that there's a gap between estimated income and hoped-for budget, there may be ways to increase your savings—or lower your spending in other areas. For example, an asset location strategy may potentially help you improve after-tax returns. To close a larger gap, you may also want to consider cutting back on your current expenses to save more for the future, or consider working longer, at least part time.
As you look ahead to retirement, you may also find it helpful to consult with a financial professional, who can help review your investments, future income needs, and projected expenses, and test-drive your plan under different market and life scenarios. "If you have a Plan A and a Plan B, you don't have to cut out all your leisure spending even if things go awry," says Gillespie. "The goal is to make it OK to enjoy your retirement life."