How much will you spend in retirement?

Retirement is a concept many people struggle to visualise on a day-to-day level, especially when planning years (or even decades) in advance.

The most common misconception is life will completely change the day you retire. Yes, your working life will alter dramatically, but your interests, traits, values and hobbies are unlikely to vanish overnight.

People often arrive at our initial consult with a vague idea of the savings they’ll need to live comfortably when it comes time to retire.  They’ve usually read or heard something about the ‘average retirement income’ believing there is a magic number which corresponds to a ‘comfortable’ vs ‘modest’ lifestyle.

While a comfortable retirement income is a reasonable goal, when examined it means very different things to each client.  What would a comfortable retirement income look like to you? $40,000 per year? $120,000?  The figure in your mind might be something entirely different.

Why? People adapt to the level of their current spending.  Any more than that tends to be thought of as excessive, any less too lean.

We tend to use a different approach. If you already have an idea of what your spending looks like now it makes sense to prepare a ‘budget as if retired’.  But most people don’t have a clear picture of where their money is going right now.

If you don’t have an existing budget, one of the best ways to get a rough estimate of your retirement income is to calculate what your total spending is right now and adjust from there.

The advantage of this approach is that it doesn’t require as much detail, which suits many people who hate the idea of having to look at where every dollar is going.

The steps are:

1. Calculate current net (take home) income.
2. Remove any expenses which are expected to stop when you retire.
3. Add any new or increased expenses expected to begin in retirement.

Here’s a real-world example from a couple I met with recently:
1. Net income

• The couple earned net incomes of $72,000 and $60,000 per annum (total net $132,000).
  

2. Remove expenses

• They are currently making home loan repayments of $32,000 and are on track to have this paid out just before retirement.
• They also have two cars, one of which they expect to sell when they retire, which should reduce expenses by about $5,000.
• Total reduction in expenses would be $37,000.
  

​3. Add expenses

• They currently spend about $5,000 on travel and would like to increase this to $10,000 (total increase to expenses of $5,000).

Based on the above, I estimated their annual retirement income needs (in today’s dollars) to be approximately $90,000 per annum ($132,000 – $37,000 + $5,000).

They were surprised by this as this was slightly higher than what they would have estimated.  However, once we discussed if there were any other areas to cut back they decided there wasn’t and were happy to work off this figure for now.

This was also because they enjoyed their work and were happier to work for longer if it meant they could continue to live a similar lifestyle.  If they decide to retire earlier we’ll simply recalculate how much they would need to reduce their expenses by in order to do so.

So how much will you spend in retirement?  If you don’t know, why not take a moment to follow the three steps above to work it out.

​Written by Dallas Davison.