Retirement Expenses

[akck]

I think the most difficult part in planning for retirement is estimating your future expenses. What will be the effect of inflation? What lifestyle changes might happen? Will expenses constantly rise or will there be some leveling off or even reductions? Will you totally lose some expenses, but pick up new ones? Also, someone who is 1 year away from retirement will likely have a better idea of their expenses than someone who is 20+ years away. Even predicting expenses 5 years out can be very difficult.

So, when I started on my retirement plan, I had no idea what I needed so I threw out the $1 million number as what I needed to supplement my other retirement resources, pension and Social Security. At that time, Social Security was just a thought and not included in the numbers. Early retirement was not part of the plan. At about age 50, I refined some of the numbers and my supplemental number dropped to $650K in the IRA and retirement age was set at 62. The $650K number required aggressive investing that would have to continue several years into retirement, a very risky plan.

Fast forward to just recently, I further refined the numbers and now include a Social Security benefit. I now figure retirement age can be 60, which is where my retirement benefits kick in, including medical. The only question is what size the IRA needs to be to meet our expenses?

I’ve found future expenses to be hard to estimate and probably next to impossible for someone 20-30 years away from retirement. Being about 6 years away does make it easier, but there can be a big range to the numbers. For example, I’ve estimated that my retirement expenses can range anywhere from a low of $45,000 to a high of $114,000 in today’s dollars. The low end assumes we pay off the mortgages and the high end assumes a house upgrade with a bigger mortgage and associated costs. I’m guessing our actual retirement expenses will be somewhere in the lower half of that range.

If we retire according to plans, our pensions will cover the low end of the range and will have some inflation protection. Unfortunately, we won’t be in a position to payoff the mortgages at retirement. I figure that will take 3 years after retirement in order to manage taxes. Social Security will further reduce our supplemental income needs, but the earliest that can kick in is two years after retirement.

Based on the above numbers, my supplemental income needs would require a portfolio ranging from $0 to $400,000 depending on where our actual retirement expenses end up. That range is significantly less that where I thought I needed to be at retirement. In fact, I may already have enough saved since my IRA falls in that range. One thing about knowing this information is that your risk profile does change. I at least am more leery about investing in higher risk asset classes and am taking action by moving towards stability.

It still comes down to how accurate you predict your future expenses. So, for those who are retired, how close were you in predicting your retirement expenses? For those within 1-2 years of retirement, how confident are you with your projections? All I can say is that I’m confident We’ll fall in the above range, but that range is too big to give me much comfort.

 

[CyclingInvestor]

Wow, you are putting much more work into it than I did. I figured I could retire
when (dividends - taxes - health insurance) equaled my take-home pay. By the
time I retired two years later at 48 (because of hitting a sweet spot at work) I had
a very comfortable cushion. In the 18 months since retiring my expenses were
much higher than expected (accident, pet cancer, travel), but well within my
buffer. I do not consider inflation a factor because the dividends have consistently
grown faster than inflation.

 

[OAG]

We are 67/70 been "retired" over 20 years. Using a combination of MS Money and Excel Spreadsheets I can predict our expenses, by year, within a $1,000 or so, out to ages 90-95. We have a military retirement and SS (taken at 62) and a "portfolio" of FDIC/NCUA insured instruments (CD's). Just for planning purposes I use an inflation rate of 3.5% and an expense increase of 5% per year. Turns out expenses usually do not increase that much but is seems to be a safe # for planning.

 

[Midpack]

Just for planning purposes I use an inflation rate of 3.5% and an expense increase of 5% per year.

Every model I've built used whatever I assumed for inflation as the "inflator" for expenses as well. Never occurred to me to use different rates, just curious why you've chosen to do so. I don't pretend to know better, just getting a new perpsective.

Using a combination of MS Money and Excel Spreadsheets I can predict our expenses, by year, within a $1,000 or so, out to ages 90-95.

I am about 2 years from retiring, and it would be very reassuring if this is true. Have those of you who have been retired for quite a while found you are able to stick to projected expenses this closely? Certainly seems possible --- I guess the uncertainty all comes from investment returns/volatility, inflation and longevity plus a few wildcards (healthcare expenses, etc.).

 

[Bikerdude]

For example, I’ve estimated that my retirement expenses can range anywhere from a low of $45,000 to a high of $114,000 in today’s dollars. The low end assumes we pay off the mortgages and the high end assumes a house upgrade with a bigger mortgage and associated costs.

I think you have to know what you are going to do in retirement before you retire. It seems most of your problem is that you have not been able to determine it. Work on that, the rest is easy.

I found the 80% of gross final pay to be a good starting point. Subtract savings that you will longer require and add costs for health care if it is not provided for you as part of your retirement package.

 

[mickeyd]

Hey Akck,

Welcome here.

I’ve found future expenses to be hard to estimate and probably next to impossible for someone 20-30 years away from retirement

I could not agree more. There are so many variables involved that it seems impossible. What I did was: to save until it hurt, then saved some more (all the time investing in equities for the long term). If after a while the pain went away, I continued to save at the same rate. If the pain was too great, I would slightly reduce the savings and would later on increase it again. I continued this process over about a 30 year period. I call it the "save until it hurts" system. I never had a dollar goal; I only had a save until it hurts goal.

As unsophisticated as this system seems today, I can report to you that it worked very well and will continue to work well for another 30 years.

 

[OAG]

Every model I've built used whatever I assumed for inflation as the "inflator" for expenses as well. Never occurred to me to use different rates, just curious why you've chosen to do so. I don't pretend to know better, just getting a new perpsective.


I am about 2 years from retiring, and it would be very reassuring if this is true. Have those of you who have been retired for quite a while found you are able to stick to projected expenses this closely? Certainly seems possible --- I guess the uncertainty all comes from investment returns/volatility, inflation and longevity plus a few wildcards (healthcare expenses, etc.).

I chose the 5% for expenses because many if not most expenses have no real correlation to the CPI (or assumed general inflation rate). I have found that the 5% compensates for those that increase at a greater rate but somewhat offset by those that did not. It seems that this gets one closer to reality at least it has over the years. Also I have an accounting background so my spreadsheets are a bit more detailed, for example I maintain accruals for anticipated large expenses (new cars, grandkids HS and College graduations as well as potential weddings). All expenses are jacked up 5% each year in the projections but then as a year ends it becomes the new base for actual future projections.

All of my savings (investments) are fixed assets (CD's) laddered out 7 years so I can actually project "investment" income pretty accurately. Currently I am working on year 2015. Thus far I have been able to fill that rung at 5% APY CD's. Although, many will argue inflation may hurt this way of saving - it has pretty well worked over the last 28 years for us. I still project we will run out of days before we run out of dollars.

 

[akck]

I think you have to know what you are going to do in retirement before you retire. It seems most of your problem is that you have not been able to determine it. Work on that, the rest is easy.

I found the 80% of gross final pay to be a good starting point. Subtract savings that you will longer require and add costs for health care if it is not provided for you as part of your retirement package.

I think I have an idea of what will be needed for retirement and it's based on the 80% of gross as you mentioned. I also wanted to review a low case and high case scenario and figured we'd end up between the two. The high case is a pie-in-sky scenario where DW gets her wish where we move and buy a place that will house all the kids and their future families for visits, meaning big mortgage and big taxes. My idea is to downgrage or stay equal on the housing so we'll be at or below where we currently are.

My biggest concern is that being $2,000 higher on your expenses means you could need an additional $50,000 in investments. While my realistic expense range is smaller, I'm uncertain if it might end up being $2,000 more than planned. So, it's good to know how well others have done.

 

[Moemg]

It still comes down to how accurate you predict your future expenses. So, for those who are retired, how close were you in predicting your retirement expenses? For those within 1-2 years of retirement, how confident are you with your projections? All I can say is that I’m confident We’ll fall in the above range, but that range is too big to give me much comfort.

I had tracked my expenses for several years before retirement . So I knew what I needed on a monthly basis . Travel was a wild card so I padded that budget . I've been retired Two years and it's working fine . I haven't used as much of my travel budget as I thought but it's there in case . All in all it's worked out easier than I could have imagined .

 

[Alan]

I am 2 years from retirement

I've tracked expenses for the last few years and am confident of the numbers. We've been FI for a couple of years now, but waiting until age 55 gets a good pension starting at 55 instead of 62, plus health insurance would continue.

For us, our biggest worry is health. While we are both currently very fit we have had some scares and realize that without decent health insurance it would have been extremely expensive.

 

[UncleHoney]

akck

One thing I did two years before retirement was shift into the retirement mindset and simulated expenses I thought we would have after I pulled the plug. Each month I drew just enough pay to cover the known expenses and rest went in the bank and my 401k. All the knowns are easy to cover and adjust for if they will change in retirement or stay the same.

The unknowns that popped up over the two years were added to the list as necessary costs that had to be covered. I didn't get anal about every penny but just kept track of how the checkbook balance ended each month. If the checkbook started to grow I'd move some to a CD. My actual pay deposit was about 25% less than what we would be getting from my pension and DW social security check.

I'm coming up on six months retired and so far things are going according to the plan. Right now I'm only drawing about 50% of my potential retirement income and we are actually banking money at that rate. And we've spent a fair amount on non essential things like decorating and some "gotta haves" for the house and hobbies.

Give yourself some breathing room in your budget for fun things because if you don't have the money for the fun stuff in retirement you might as well keep on working.

 

[Retire Soon]

I've tracked expenses for the last few years and am confident of the numbers. .
quote]

In my way of thinking, this will provide the most reliable estimate of expenses in retirement. Your really do need to know what you are spending. Also, take into account that after ER your income tax situation will change dramatically. I recommend that you run a hypothetical earnings situation on TurboTax to learn what the difference will be. From my personal experience with ER, this method worked extremely well for DW and me.

 

[aworkingrachel]

I go crazy when I start *really* trying to estimate how much retirement will cost me...it's a long time off for me as well with many life changes possible along the way.

My strategy for now is basically what mickeyd said. I figure I can fine-tune later.

 

[megacorp-firee]

First a philosohical statement:
I am a true believer in not 'exceeding the precision of the model'. It's too much work for a dubious return.

After having said that and being 9 months (or so) into retirement, we don't spend as much as we had allocated. I overkilled our investment portfolio. NOt on purpose, but due to my goal of 30 years at megacorp and maxing out our 401k, stock plan, and tossing any 'overage' into my after tax account (terminal saver syndrome).
So some may say that I messed up and should have (could have) retired earlier. ... but sometimes the lord looks after idiots and drunks ... with the current stock market, I am looking at a 6 figure paper loss and am sleeping like a babe. ... so much for precision planning.

IMO, the real answer is that with a modicum of planning (i.e. how much do I THINK I will need, how will I get to that number) and good implementation you will get there. If the number is too high, you will have overage (a nice problem to have), ... if the number is too low, you will tighten up your belt (or delay retirement for another year or so).

Reread my philosophical statement. Good luck.

 

[megacorp-firee]

Give yourself some breathing room in your budget for fun things because if you don't have the money for the fun stuff in retirement you might as well keep on working.

Amen ... what UncleHoney said.

 

[Midpack]

With 2-4 years to retirement, what I have learned so far:

Spending
- I have tracked spending so I know what we spend.
- I have categorized every expense as 'essential' and/or 'extras.'
- For retirement I have taken out or reduced work related expenses and added $1000/month for health care (a high deductible plan, we're in good health and all current estimates are far below $1000),
- all expenses increased by 3% inflation each year (presumably some will be more, some less).

The Number and Withdrawal
- We have no children, so leaving an estate is not a goal, although I know it's unlikely we can plan to 'die broke,'
- my nest egg 'number' is based on continuing spending on essentials and extras increasing every category at 3% inflation - so I'm planning on much more than essentials, but we can cut back to that spending if needed,
- only a 6-7% return (historically our AA has done better),
- living to 100 (I hope not),
- getting 50-75% of what my SS statements says,
- all taxes estimated using current tax tables increasing with inflation (probably optimistic),
- about 75/25 equities/bonds now, can't imagine going below 60/40 until we really get out there age wise --- maybe,
- we will probably start out withdrawing in a manner similar to the Bob Clyatt approach, but obviously we can always adjust,
- might annuitize up to half, but we'll see.

Criticism is welcome...

 

[dm]

Ive only been retired for 6 months, but so far our expenses are pretty much what I had planned. I started tracking my expenses 5 years ago so I had a handle on what we were spending. Our expenses varied mostly from optional spending, not inflation. I did work out a no frills budget and a budget based on what we normaly spend. In the past we never really had a budget so this did vary quite a bit but I took an average.

My wife is eligible for a COLA pension so that helps take some of the worry out. Ive run Firecalc and it says we should be fine. I really just got to the point that even if it meant we had to cut back at some time in the future, I was ready to leave the workforce.

I was more worried about working to long and not be able to do the things that I wanted to do than running out of money.

 

[W2R]

With 2-4 years to retirement, what I have learned so far:

Spending
- I have tracked spending so I know what we spend.
- I have categorized every expense as 'essential' and/or 'extras.'
- For retirement I have taken out or reduced work related expenses and added $1000/month for health care (a high deductible plan, we're in good health and all current estimates are far below $1000),
- all expenses increased by 3% inflation each year (presumably some will be more, some less).

The Number and Withdrawal
- We have no children, so leaving an estate is not a goal, although I know it's unlikely we can plan to 'die broke,'
- my nest egg 'number' is based on continuing spending on essentials and extras increasing every category at 3% inflation - so I'm planning on much more than essentials, but we can cut back to that spending if needed,
- only a 6-7% return (historically our AA has done better),
- living to 100 (I hope not),
- getting 50-75% of what my SS statements says,
- all taxes estimated using current tax tables increasing with inflation (probably optimistic),
- about 75/25 equities/bonds now, can't imagine going below 60/40 until we really get out there age wise --- maybe,
- we will probably start out withdrawing in a manner similar to the Bob Clyatt approach, but obviously we can always adjust,
- might annuitize up to half, but we'll see.

Criticism is welcome...

I like your cautious approach with the 6-7% return, living to 100, and getting 50-75% of what your SS statement says.

I am not one of those who is against annuities, but even I would consider half to be way too big a percentage for most people to annuitize. I would think 25% to 33% of one's portfolio to be a pretty ample annuity for most who wish to buy one. Just my reaction and hey, what do I know.

Personally, I planned to put about 28% into an annuity until my recent windfall, which allows me a little more leeway. Now, instead of the annuity I will have a substantial chunk in Vanguard's Wellesley. I expect that Wellesley is unlikely to pay as well as an annuity but there are other advantages that are well discussed in other threads.

 

[akck]

akck

One thing I did two years before retirement was shift into the retirement mindset and simulated expenses I thought we would have after I pulled the plug. Each month I drew just enough pay to cover the known expenses and rest went in the bank and my 401k. All the knowns are easy to cover and adjust for if they will change in retirement or stay the same.

The unknowns that popped up over the two years were added to the list as necessary costs that had to be covered. I didn't get anal about every penny but just kept track of how the checkbook balance ended each month. If the checkbook started to grow I'd move some to a CD. My actual pay deposit was about 25% less than what we would be getting from my pension and DW social security check.

I'm coming up on six months retired and so far things are going according to the plan. Right now I'm only drawing about 50% of my potential retirement income and we are actually banking money at that rate. And we've spent a fair amount on non essential things like decorating and some "gotta haves" for the house and hobbies.

Give yourself some breathing room in your budget for fun things because if you don't have the money for the fun stuff in retirement you might as well keep on working.

Sounds like a good plan and we'll likely do the same thing two years before retirement. I did budget for fun things including travel in retirement and have a budgeted slush fund for unknowns. We're lucky enough to have a retirement plan that provides medical coverage, which keeps our medical expense budget down.

What's comforting to me is that you and others are living under your budget. I'd be more than happy to bank any extra income and based on your experience, it may happen for me. I think I've been overly pessimistic in estimating my retirement expenses, but you never know until you get there. Hearing about your success stories makes it much easier to sleep at night. Thanks

 

[Midpack]

Give yourself some breathing room in your budget for fun things because if you don't have the money for the fun stuff in retirement you might as well keep on working.

No truer words...main reason we're still working even though we're (thankfully) FI.

 

[Midpack]

I am not one of those who is against annuities, but even I would consider half to be way too big a percentage for most people to annuitize. I would think 25% to 33% of one's portfolio to be a pretty ample annuity for most who wish to buy one. Just my reaction and hey, what do I know.

Personally, I planned to put about 28% into an annuity until my recent windfall, which allows me a little more leeway. Now, instead of the annuity I will have a substantial chunk in Vanguard's Wellesley. I expect that Wellesley is unlikely to pay as well as an annuity but there are other advantages that are well discussed in other threads.

I am still grappling with annuitization so this if of interest to me, if you care to elaborate. PM if you'd prefer...TIA

 

[W2R]

I am still grappling with annuitization so this if of interest to me, if you care to elaborate. PM if you'd prefer...TIA

Here's a thread on the topic of Wellesley vs an annuity that might interest you.

http://www.early-retirement.org/forums/f28/wellesley-vs-annuity-31658.html

There are many threads on the forum on these topics, so you might want to do a search on them.

Depending on your age, an annuity may pay better than Wellesley. When my ER nestegg was just borderline and I was fighting with my spreadsheet, trying to figure out how to get my goal income, the only way I could seem to get that figure for ER was to work until 62 and take an fixed immediate lifetime annuity with inflation protection. I only have one child and so I wasn't worried about leaving a huge estate.

However, since my recent windfall I will have no problem reaching my goal ER income at all, even without an annuity. I think that for me, an annuity is something that I would have needed with a nestegg that was borderline sufficient, but that I no longer need. (If my investments do badly one year, so what - - I will no longer need a 4% SWR, and in the long run they will probably gain).

For me, the idea of giving up the money to an insurance company and never seeing it again is not a problem. However, what happens if the insurance company goes belly up? I'm not sure. Can they sell the annuity agreement to a less reliable company? I'm not sure. I happen to distrust insurance companies in general and I would find some answers to these questions if I were still to purchase an annuity.

Since you cannot change your mind after buying an annuity, it is worth thinking about how it fits into your overall financial plan's asset allocation and diversification.

 

[old woman]

I have no idea what my expenses in retirement will be, I don't even know where I will live. I will sell my current house because it has too many stairs and the basement leaks. So I need to sell and buy a house, move and don't know even what utilities might be in a new place. I figure if the people living in a town have an average income of 30K and I have more I will get by. The big question is medical cost, I might have a problem buying insurance at any cost so go with a very high deductible.
I will plan my budget to have more than I could spend for housing and utilities and some for transportation and wants with a generous margin then if I can't make it I can cut back on wants or find a way to earn a little money. I figure if I had a home paid off I could cover property tax, utilities and keeping a car buying food and minor needs on under 2K a month and SS will pay about 1,200 and a roommate about 800 so I am about at break even before medical or using any lifesavings after 62. I will be 60 next month so waiting for 62 might let me save a little more giving me maybe 400K and a paid off home which should cover medical cost. I could inherit someday but not a lot and not for sure mom has a little but she might spend it all before she goes and I might be 80 before she dies, she was 80 when her mom died.