Yes, of course you can predict your spending needs in retirement. Many financial institutions and brokerages want you to think otherwise; they benefit from you oversaving for retirement.
The premise is that you should save a lot more than you need, just to be sure. Financial institutions try to make us fearful so that we keep more of our money with them and work much longer than we need to.
Mainstream media sells fear. And they make damn good money on it. They sell you the fear and they offer you reprieve:
“You don’t know how the markets will perform in the future!”
“Your healthcare spending might be astronomical!”
“Inflation will eat away a large portion of your wealth!”
“You don’t want to live in poverty!”
And my favorite: “You need 80% of your current income to be comfortable in retirement!”
Anything which seems unknown to us is used by marketers to profit from us. Often, this is malicious. But you, as the consumer, need to know the exact values, or else you will keep saving and saving out of fear.
Predicting your spending needs in retirement
Without doubt, your spending in retirement will be far lower than it is now. Even if you’re a little flagrant with your money, you’ll be spending less in retirement.
The biggest hurdle many of you will overcome is the obsession with traveling. You may have all these dreams that you will hike some far-flung mountain and dive with some sea creatures resembling my high school English teacher.
After you get your fill, after multiple cavity checks by the TSA, after a few bouts of diarrhea, and the traffic getting to and from airports, you’ll yearn desperately for the comfort of your home, your gym, and your favorite cafe.
Your spending needs in retirement will be dictated by your desired lifestyle which you need to determine now. That’s the entire premise of this post; figure out how you want to live in the future, do the math, and save that amount. You’ll take into account investment returns, inflation, and other basic personal finance facts.
A PA colleague of mine lives on a small ranch with his wife in a very affordable state. His spending is somewhere in the $40k a year with no debt. Somehow, his financial advisor convinced him that he needs $2.2M before retiring. So he’s still at it at age 60, hoping to set aside another $400k in order to reach that goal. Ouch.
Desired lifestyle in retirement
I don’t know anyone who travels a lot in retirement and I know quite a few retired people. Many are sick of it or just got it out of their system. So let’s skip the $5k/month travel budget for now.
Other lavish lifestyle decisions might be dining out, fancy clothes, and fancy cars. One of my friends is in $650k of debt and earns around $100k as a lawyer. She’s single and loves spending on clothes and fine dining – hence the level of debt at age 40.
From a retirement perspective, her financial diagnosis is that she’s fucked. Her desired lifestyle will require $100k a year of income which can only be had with an investment north of $2.5 million. It’s not impossible – but accumulating $2.5M with that small income and that lavish lifestyle is tough.
To figure out your spending categories, decide what you’ll be spending on the following categories. Knowing how much you will want to spend will dictate how much you need to save.
For example, if you have a $1.5M home, the property tax and maintenance on that alone will be $30,000 a year. But if you have a matchbox sized condo worth $150k, you’ll spend only $6k/year.
Are you going to be eating out everyday, trying the newest and greatest restaurant? Unless you have superhero genes, your blood pressure and cholesterol will eventually retaliate. But you might eat out worth $1k/month and do groceries worth another $500/month.
If you’re a car enthusiast then $1,500/month is the bare minimum you’ll spend on your car and you can get well into the $3k/month range. If you prefer to hoof it, your transportation costs might be $15/month.
Retired people like to give gifts and support others. So you want to set some money aside for that, maybe $1,000-2,000/month.
Finally, you may want to travel, buy some fancy gear, take road trips, go to some shows. You’ll have to decide how much you want to spend on those experiences.
When retired, you won’t need life insurance, you won’t need disability insurance, you won’t need cell phone insurance, you shouldn’t need a comprehensive auto policy or a homeowner policy if you are truly financially independent.
How much are you willing to work?
The biggest decision you’ll make is how much are you willing to work, save, and invest in order to afford the luxuries above. If you figure this out, you can adjust your spending categories above.
I’ve decided that I love my free time but don’t care for spending on consumer shit. I’m willing to forgo a car, a cell phone, and fancy food if that means that I can retire early and do whatever the fuck I want with my time.
This is what allowed me to retire in 2016. No complaints here. Though I’m told I’m missing out majorly by not hiking Machu Picchu and not seeing the Eiffel tower in person. I’m also told that I’ll regret not having kids.
Predicting your retirement
Now that you know what you want to spend, you can calculate what you need to save. The math is simple and has no biases built into it. You can’t claim racism or sexism or ageism when it comes to the math.
What you want to spend, that’s completely up to you. But what you need to save – that’s not up to you, that’s up to the markets; it’s up to a little chance, but mostly math.
If you’ve been reading my blog or have a basic understanding of personal finance, you should know how much you need to invest in the markets or save in form of cash in order to secure your desired retirement spending.
The main factors to keep in mind are:
- rate of return (based on investments)
- risk (based on diversification)
- inflation (based on the economy and politics)
- buffer (base on your spending needs)