How Much Will You Really Spend in Retirement?

February 1, 2019  |  

How Much Will You Really Spend in Retirement?

It may be more than you think. 

  • “ How much will I (or am I currently) spending in retirement?”
  • “How much do I need to save for retirement?”

These two questions constantly weigh on the minds of retirees and near retirees. I wish I had a clean and simple answer, but the truth depends on a wide variety of variables. 

No two retiree situations are the same. But, there are several rules of thumb that many financial advisors and retirees like to use.  Take the widely used Percent of Income Rule which is based on the theory that retirees will need about 70- to 80-percent of their working income to maintain the same standard of living in retirement.

For example, the Percent of Income Rule says a single person with a $100,000 annual working income should expect to spend about $80,000 per year during retirement.  Their needs are theoretically about 20 percent lower in retirement because many daily expenses associated with working are eliminated—i.e. commuting, breakfast and lunch on the go, wardrobe, wear and tear on the car, etc. The Rule also assumes that Social Security benefits will help supplement the retiree’s income in their golden years. 

But, as we know, conventional wisdom is not always the correct guidance.

Results of a Recent Survey

The Wall Street Journal published results of an intriguing survey last September showing that most of us vastly underestimate the percentage of income we’ll need in retirement. Researchers asked a group of participants very specific questions about their planned spending needs in retirement–lifestyle, travel, entertainment and basic living needs.  The findings were eye-opening. On average, respondents planned to spend a whopping 130 percent of their employment income during retirement.

Obviously, those survey respondents will need to change their retirement savings calculus in a big way. The Journal did not say how many respondents took the survey or what their income level was, but the results are startling.  Is the survey representative of all retirement planning scenarios?  Probably not.  But, results like these allow retirees and financial planners to think more critically about savings and spending both pre- and post- retirement.

5 key retirement planning considerations

Preparing for retirement is a major life change and it can feel overwhelming.  Many people, especially longtime salaried workers will initially panic when their paychecks stop coming and they need to start withdrawing from their savings. That’s what they’ve been saving up for all these years, but it’s still a big adjustment when it finally comes time to start reaching in to one’s nest egg.

Having a solid financial plan in place will help ease those emotions.  Here a few things to keep in mind:

  1. Retirement is a fluid situation. No matter how much you plan, life happens.  Your expenses will be higher or lower in certain years.  It is critical to update your financial plan (at least every 2-3 years) to gauge whether you are still on track.
  2. Plan for the long-haul. The two greatest fears most retirees face are running out of money and dying too young.  Thanks to advances in medicine and technology, people are living longer than ever. Many retirement calculators use age 95 as a median lifespan for healthy near-retirees to work with. Some people in good health who have a family history of longevity will even use age 100 or older as their lifespan benchmark.
  3. Learn how to budget (or at least try). If nothing else, be honest with yourself about your spending or planned spending. Some people enjoy creating detailed budgets, while others do not. At the very least, having an idea of how much you are spending is critical.
  4. Understand your portfolio. Make sure your asset allocation matches your risk profile and spending needs. Diversify your holdings; keep investment costs low and be disciplined. Seek help. You are not alone in your retirement journey. Working with a wealth advisor can ease your fears and open your eyes to important strategies that can further solidify your plan.  We believe that an independent, fee-only, fiduciary advisor provides the greatest value to a retiree’s plan.
  5. Enjoy your retirement. This may sound hypocritical but, retiring is an accomplishment. You worked hard to reach this stage in life. Take a moment to smile and enjoy life. You earned it.

Conclusion

Helping our clients navigate retirement while being good stewards of their wealth is our mission at Independence AdvisorsWhether you work with an advisor or not, the most important part of retirement readiness is having a plan I recently came across an interesting quote: “A person without plans for the future will always return to their past.” Have a plan, and (try to) enjoy the ride.

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About Patrick Melvin Jr.

Patrick D. Melvin Jr., is a Wealth Manager at Independence Advisors, LLC. Pat models client’s financial plans and works with the firm’s clients on financial planning areas such as retirement planning, investment planning and estate planning. CLICK HERE TO ASK PAT.
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