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Retirement reality check: Time to get a grip

Most of the time, right before you retire, you are at the highest discretionary income in your life. The kids had left the house (hopefully), you may have two incomes coming in, and you are having a lot of fun. Dinners out with friends, vacations, nice cars … life is grand! You cannot wait until you are retired and you can do this full time. So finally you pull the ripcord, fully retire, and plan on having the time of your life…until you meet with me (or someone like me) and you get the bad news. There is no way that you can continue to spend at the level that you are, and not run out of money! WHAT?? I want to get a new planner! Trust me, changing the planner will not help, you need to change the plan.

After the original conversation sinks in, most people come to realize that they really need to plan for this (you think???) and get a handle on what they can spend. So, the question becomes: How can we make this happen and have fun?

Retirement and your income in retirement is all about choices and every decision has a ripple effect. It is about what you are willing to compromise on to make the master plan work.

Here are a few ideas to make this work:

Andy Ryan | FoodPix | Getty Images

Expenses. We need to start with what you are spending on a regular basis and break it out three ways. First, the necessities (shelter, medical expenses, electric, gas, insurance) and then, the wants and the wish list. After the expenses are divided, I give them a weighting of 1-10. Tens are must have, and ones are on the wish list. Also, we need to consider inflation.

Income. What do you have coming in, reasonably, from your investments, Social Security, pensions, etc.? Generally, withdrawal rates on investment accounts are around 4 percent or lower, depending on the ages. Add this to any pension and Social Security benefit and that is all we have to work with.

(Read more: How to rescue your retirement at 55)

Compare the two. If expenses are below income, go back to the beach and enjoy your margarita! If expenses are above income, then we have some work to do. First let's see what the difference is as that is the number (minimum) that we need to cut. Let's get to it.

So, we have divided our expenses into needs, wants and the wish list. It still may be possible to accomplish everything but we are going to need to get creative. Let's start with the needs.

The needs list

I would assume that with rankings close to 10 included housing, auto expenses and medical. Let's just focus on this and remember, it is all about choices.

Housing. The bigger the number, the more we see if we can shrink it. Many people want to stay in the home that they lived in forever, but in most cases, that is not realistic! The home may be paid off however, depending on where you live, the property taxes can still be quite substantial. The property may be much larger they you need or it may be a two-story and guess what? At some point, you will need a one-story as you get much older. Oh yeah, you are the only retired person on the block and all of your friends have moved away. This may be a perfect time to rethink where you need to be in the next 10-20 years, incorporate it into the plan, and reduce your expenses.

(Read more: Six retirement myths you need to ignore)

Auto. Yeah, a sports car or a luxury sedan are impressive and very nice, however they are expensive. You need a car but not necessarily a car that costs you $1,000 per month plus insurance. Maybe you can bring it down a little and either get a certified pre-owned, hold the cars for longer time periods, or just get less expensive cars.

Everything on this list is necessary, however is it necessary at the level you are currently spending at? It is important to realize that even the "needs" are negotiable, and that dollars saved means that we have more flexibility in other areas.

The wants

This may include vacations, helping the kids with money, country clubs, etc. The key here is to develop a "reasonable range" so we can know what we would like to have, and what is the bare minimum that we can accept. Few examples.

Vacations. So, maybe we would like to do three vacations per year for a total of $10,000 per year. Is it possible to reduce that maybe to two per year? That would save you $3,333 per year. If three is a must, can we cut the cost? Maybe we can visit friends that we have not seen and stay with them. What are other creative ways we can cut this expense?

Country clubs. I have never met anyone who belonged to a country club that said it was financially better for them to be a member then to go to public courses! It is more a lifestyle decision. Let's think about alternatives that may work and help save money.

(Read more: The best retirement investments you can't have)

Kids. I have never met a financially successful person that was "on the dole" from their parents. Generally you end up subsidizing your kid's lifestyle and then never make the tough decisions that they need to succeed. Subsidizing your kids in retirement is a sure way to go broke — then everyone goes down.

The wishes

This may be called the "Bucket list." Generally, they are more expensive items that would be terrific to do, the key is seeing if it works in your plan.

So, let's assume that you prioritized, cut, retooled and still the numbers do not work, what do you do then? Simple. You do not retire or, at least, you figure out a plan B.

Plan B may include:

Push back retirement a few years until the numbers do make sense. Let's say you need $50,000 annually to live. Pushing off three years saves $150,000, which invested at 7 percent for 20 years, gives you an additional $580,000 at the back end of your plan. That's a lot more than just $50,000 a year!

Part-time work. if you only earn $20,000 annually, that may be able to pay for those vacations or extra treats that you want in retirement.

Push back Social Security. Every year you wait, your benefit increases by 8 percent, and almost doubles from age 62 to age 70. Get 65 out of your mind as it is not realistic for most of the U.S. population. It is incredibly difficult to be retired from 65 to 85, which is around average life expectancy, and not run out of money. Don't gets sucked into the "I'm a failure if I do not retire at age 65" trap.

Everyone wants to be retired, have fun, go on great vacations, and spend money on the kids. Every decision that you make in life and especially in retirement has a ripple effect. It is better to push back retirement a few years when you are you (even if you hate it), than to run out of money in your 80s. A solid retirement income and expense plan means that you can still have fun, but just with a realistic budget! Retirement income and expenses are about choices. Knowing your numbers and what you are willing to compromise on will give you the ability to enjoy your retirement and not have to worry about money.

— By Jerry Lynch

Jerry Lynch is a certified financial planner, chartered underwriter and chartered financial consultant (CFP, CLU, ChFC). He is president of JFL Total Wealth Management, a registered investment-advisory firm. Follow him on Twitter @JFLJerry.

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