How To Figure Out Your Retirement Needs Based on What You Spend Now
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Your current spending isn’t just reflective of how you live now; it can be a predictor of how much money you’ll need in retirement if you extrapolate into the future.
While some expenses do change in retirement, trying to plan for a lifestyle that is similar to the one you live now can help you make sure you have enough saved and invested when the time comes. Retirement experts offered tips on how to figure out just how much you’ll need in retirement based on current spending.
Look, Don’t Guess
The simplest way to turn your current monthly spending into a target retirement budget is to determine what you actually spend each month without guessing, according to Evan Patzer, life insurance and retirement strategizing specialist at LifeWealth Solutions. “Remove work expenses, add retirement ones like travel and healthcare, and that’s your baseline.”
Do This Math
To get more granular, Jay Zigmont, a CFP and founder of Childfree Trust, suggested doing the following math: “The rough math is that you need 25 times your current annual expenses in investments to retire.” So, if you spend $40,000 per year, you need $1 million to retire, based on the Safe Withdrawal Rate (SWR) of 4%, he explained.
Of course, the average household spends far more than $40,000 per year, but that gives you a clear sense of the math involved.
Adjust For Inflation
When adjusting today’s spending for inflation between now and retirement, Patzer recommended using a 3% inflation rate (slightly higher than The Fed’s target of 2%), though this may apply more to healthcare and lifestyle spending, he said.
Zigmont urged, “Don’t worry about getting it exactly right this second, as there are too many factors to consider. As you get close to retirement, you will want to meet with a CFP to look at your entire retirement and tax plan, to do simulations and create a drawdown plan.”
Prepare For the ‘Retirement Smile’
Zigmont explained that spending in retirement tends to look like what finance professionals call the “retirement smile.” You spend more when you first go into retirement as you check things off your bucket list, then it tapers off for a while. Eventually, your spending goes up at the end of retirement due to the high costs of long-term care.
Expect These Expenses To Drop
It might be hard to guess which expenses to plan for being higher in retirement, but Patzer suggested that you can usually expect work costs, mortgage payments and child expenses to decrease. “Travel, healthcare and leisure spending will typically rise in retirement. In retirement, you shift from obligations to experiences.”
Be Realistic About Healthcare Expenses
The biggest expense to budget for, and maybe even over-budget for, is healthcare. Patzer pointed out that if you retire before Medicare, you should prepare for double the costs until Medicare age.
However, Zigmont pointed out that there is no way to know what Medicare will truly cost in the long-term, say 10 to 20 years from now. “The greater challenge is planning for long-term care. Medicare does not pay for long-term care, and Medicaid only pays once you run out of assets.”
He worries that with Medicare cuts on the table currently, “it may not be a safe fallback anymore.” He pointed out that a year in a skilled nursing facility runs around $125,000 on average. “In today’s dollars I encourage clients to set aside $500,000 for long-term care or to buy a stand-alone long-term care insurance plan.”
Consider If Your Housing Needs Will Change
Paying off your mortgage will help dramatically lower retirement expenses, naturally, Patzer said. Additionally, downsizing or tapping home equity can create flexibility and liquidity.
Zigmont pointed out that moving to an area with a lower cost of living can make your retirement savings go further. Pick a state with no income tax on retirement and it can save you up to 10% on state taxes, he said.
Consider Social Security Timing
When it comes to Social Security, delaying benefits to the maximum age of 70 can also help increase future retirement income, Patzer said, but you have to be careful to coordinate with your other assets. “Optimize total lifetime income, not just the benefit amount.”
Additionally, Zigmont pointed out that Social Security should be seen “as an adjunct to your savings, not a replacement.” Additionally, for anyone under 45, plan to receive a reduced amount of Social Security, or possibly none, depending on what happens to the solvency and direction of the program.
Plan For Longevity
Even if you have your doubts, Patzer encouraged everyone to plan for longevity financially. “Everyone should plan to live to age 95 and include at least one guaranteed lifetime income source. This way they can spend confidently without worrying about outliving their money,” he said.
By using your current spending as a guide and factoring in future inflation, healthcare costs and lifestyle changes, you can create a realistic plan that helps you retire with comfort and confidence.
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