A retirement plan is not a one-time calculation. Your spending, investment returns, and life circumstances change year to year. An annual review helps you catch problems early and make adjustments before small variances become major issues.
Why Annual Reviews Matter
Retirement planning involves assumptions about spending, inflation, investment returns, and life expectancy. These assumptions will be wrong to some degree. Annual reviews let you compare actual results to your plan and adjust course.
Without regular monitoring:
- Overspending can deplete your portfolio faster than expected
- Underspending can mean unnecessary lifestyle restrictions
- Portfolio drift can increase risk or reduce returns
- Changed circumstances may go unaddressed
The goal is not perfection but awareness. Knowing where you stand lets you make informed decisions.
The Annual Review Checklist
Complete these tasks each year, ideally at the same time (many people choose January or their birthday):
Spending review:
- Total all spending from the past 12 months
- Categorize spending (housing, healthcare, travel, food, etc.)
- Compare to your planned budget
- Identify large unexpected expenses
Portfolio review:
- Calculate your current portfolio value
- Determine your actual withdrawal rate for the year
- Check asset allocation vs. target
- Review investment performance
Assumption review:
- Recalculate how many years your portfolio needs to last
- Update for any changes in Social Security or pension
- Adjust for known upcoming expenses
- Consider changes in health or life expectancy
Document review:
- Confirm beneficiary designations are current
- Review insurance coverage needs
- Update estate documents if circumstances changed
Tracking Spending Variance
Variance is the difference between your planned spending and actual spending. Track this in both dollars and percentages.
Variance calculation:
| Item | Formula | Example |
|---|---|---|
| Dollar variance | Actual - Planned | $66,000 - $60,000 = $6,000 over |
| Percentage variance | (Actual - Planned) / Planned × 100 | ($6,000 / $60,000) × 100 = 10% over |
Creating a simple tracking table:
| Category | Planned | Actual | Variance | % Variance |
|---|---|---|---|---|
| Housing | $18,000 | $18,500 | +$500 | +2.8% |
| Healthcare | $8,000 | $9,200 | +$1,200 | +15.0% |
| Food | $9,600 | $10,100 | +$500 | +5.2% |
| Transportation | $6,000 | $5,800 | -$200 | -3.3% |
| Travel | $8,000 | $12,000 | +$4,000 | +50.0% |
| Other | $10,400 | $10,400 | $0 | 0% |
| Total | $60,000 | $66,000 | +$6,000 | +10.0% |
Tracking by category helps identify where overspending occurs. In this example, travel spending was the primary driver of the variance.
Adjustment Triggers
Not every variance requires action. Small fluctuations are normal. Establish trigger points that prompt a response.
Common trigger thresholds:
| Variance Level | Suggested Response |
|---|---|
| Under 5% | Monitor, no action needed |
| 5-10% | Investigate causes, consider minor adjustments |
| Over 10% | Develop specific action plan |
| Over 15% | Significant changes required |
Positive variance (underspending): If you’re consistently spending less than planned, you may be restricting your lifestyle unnecessarily. Consider whether you’re on track to leave more than intended or whether you could increase spending.
Negative variance (overspending): Spending more than planned requires understanding why. Was it a one-time expense (new roof, medical procedure) or ongoing category creep?
Portfolio Rebalancing During Review
Your annual review is a natural time to rebalance your portfolio. Rebalancing restores your target asset allocation after market movements have shifted it.
Rebalancing example:
| Asset Class | Target | Current Value | Current % | Action |
|---|---|---|---|---|
| U.S. Stocks | 40% | $440,000 | 44% | Reduce |
| International Stocks | 20% | $190,000 | 19% | Hold |
| Bonds | 35% | $320,000 | 32% | Increase |
| Cash | 5% | $50,000 | 5% | Hold |
| Total | 100% | $1,000,000 | 100% |
In this example, strong stock performance pushed U.S. stocks above target. Rebalancing would sell $40,000 of stocks and purchase bonds to restore the 40/35 allocation.
Rebalancing approaches:
- Threshold rebalancing: Only rebalance when an asset class drifts more than 5% from target
- Cash flow rebalancing: Direct withdrawals and deposits to restore balance
- Annual rebalancing: Rebalance once per year regardless of drift
Tax considerations matter. In taxable accounts, selling appreciated assets triggers capital gains. When possible, rebalance using new contributions, dividends, or withdrawals rather than selling.
Worked Example: Couple Discovering 8% Overspending
Janet and Mike’s situation:
- Ages: 67 and 69
- Portfolio: $850,000 at start of year
- Planned annual spending: $52,000
- Social Security: $36,000 combined
- Total planned income need: $52,000 (covered by SS + $16,000 from portfolio)
Their year-end review reveals:
| Category | Planned | Actual |
|---|---|---|
| Essential expenses | $36,000 | $37,200 |
| Healthcare | $6,000 | $7,800 |
| Travel | $6,000 | $8,500 |
| Gifts/Entertainment | $4,000 | $5,600 |
| Total | $52,000 | $59,100 |
Variance: $7,100 overspending (13.7% over plan)
Portfolio impact:
- Planned withdrawal: $16,000
- Actual withdrawal needed: $23,100
- Additional $7,100 drawn from portfolio
Janet and Mike’s analysis:
- Healthcare: $1,800 over due to unexpected dental work (one-time)
- Travel: $2,500 over due to an extra trip to see grandchildren (discretionary)
- Gifts: $1,600 over due to a grandchild’s wedding (one-time)
Their adjustment plan:
| Action | Annual Savings |
|---|---|
| Skip one trip next year | $3,000 |
| Reduce gift budget | $800 |
| Build dental into healthcare budget | $0 (adjust budget) |
| Total spending reduction | $3,800 |
Updated plan:
- Increase healthcare budget to $7,000 (reflecting ongoing needs)
- Reduce discretionary travel to $5,000
- Reduce gifts to $3,200
- New total budget: $53,200
This 2.3% budget increase is manageable. Their withdrawal rate increases slightly from 1.9% to 2.0%, still well within sustainable limits.
If no adjustments were made: Continuing 13.7% overspending would compound. Over 10 years, this could deplete their portfolio $70,000+ faster than planned, potentially creating problems in their 80s.
Tools for Tracking
You don’t need complex software. Simple approaches work well:
Spreadsheet tracking: Create a basic spreadsheet with monthly spending by category. Total annually and compare to plan.
Account aggregation: Many banks and brokerages offer spending analysis tools that categorize transactions automatically.
Monthly review: Some people prefer monthly check-ins to catch issues earlier. Even a 5-minute monthly review helps.
Written record: Keep your annual review summaries. Reviewing trends over multiple years reveals patterns.
Annual Retirement Review Checklist
- Calculate total spending for the past 12 months
- Compare actual spending to planned budget by category
- Calculate the percentage variance (over/under plan)
- Identify causes for any variance over 5%
- Determine if variances were one-time or ongoing
- Calculate your current portfolio value
- Determine your actual withdrawal rate for the year
- Check if portfolio returns matched assumptions
- Review asset allocation and rebalance if needed
- Update your plan for any known future expenses
- Adjust budget categories based on actual spending patterns
- Create a specific action plan if overspending exceeds 10%
- Document review results for comparison next year
- Set calendar reminder for next annual review
