Backing into Retirement Income Needs

[ProGolferWannabe]

Hi. I am would like to retire in 2018 at age 56, so I am trying to get a bit more serious to see if this financially realistic. I have never been much of a budgeter or tracker of my spending, and I know many of you recommend getting a good grip on this before making the jump into retirement--this is something I will try and do over the next coupe of years.

One thing I have done to try and estimate our cash needs is to start with our current gross income and back out all of the expenses that we will not be incurring in retirement---401k deductions, HSA deductions, social security/medicare taxes, disability insurance premiums, after tax retirement savings amounts, a deduction to account for lower federal/state income taxes, etc. To that I added some additional expenses that I anticipated we may incur while in retirement---some increased medical costs, initially some more travel, etc. Frankly, other than additional medical expenses I did not add much as we pretty much travel, eat out, etc. as much as we care to now---I am not sure that those discretionary expenses would change much in retirement.

In general, is this a reasonable benchmark for actual spending in retirement, or do you think actual spending will end up being more or less than this sort of analysis would show? Obviously the best thing to do is to track the spending, but I am hopeful this number is in the ballpark, as it indicates that our likely spending is less than our anticipated income sources in retirement.

Thanks.

 

[papadad111]

Don't forget the infrequent larger capital purchases. New car. Roof repair. Wedding. Etc. You're cash flow based budget seems like a reasonable method to establish at least a corner case.

 

[bizlady]

Your methodology is a start, but I would strongly recommend you get a good handle on your revenue and expenses. You do not indicate whether or not you have a spouse, or children at home. Once you get a handle on expenses, at a minimum, I would suggest you have 25 to 30 times that amount in savings. You can subtract from that any pensions and/or social security.

 

[MichaelB]

Here are some critical questions you might want to look over to help determine your retirement needs. http://www.early-retirement.org/for...re-asking-can-i-retire-69999.html#post1399715

 

[Davis65]

It is a good start, but this such an important decision that you don't want to get it wrong. I also use a backing in a approach as one of my measures. I'm looking to retire next year at 50, so I am obsessing over the numbers now.

I've looked at the 70% of current income rule of thumb that the financial sector uses. It is probably the least useful measure.

I have also talked to retired friends of similar means who told me what their budget is.

Finally, the most useful measure has been to sit down and do up a budget:
1. I listed all of the known expenses (property tax, utilities, condo fees, insurance, car) - you can find checklists on the interweb to help
2. I put in provisions for "other" expenses (groceries, entertainment)
3. I identified an annual budget for airfare, and a daily budget for travel and the numbers of days we want to travel in a year. We tested this budget in Mexico in December and came in way under, and will retest in Germany this fall, which will likely come in much closer to the limit.
4. As mentioned by Father Papadad Senior above, I factored in large occasional expenses like cars.
5. I added a cushion for the unknown.

After you've done your budget, how does this compare to your other measures?

 

[W2R]

I'd say that instead of looking at current gross income, it would be best to look at current spending (once you have determined exactly what that is for a couple of years). You can probably get a ballpark estimate of that starting with your gross income, as you suggest, but estimates are not going to be as good as the actual spending values.

Then subtract expenses that may vanish or lessen in retirement (taxes, work clothes, etc.), and add expenses that may be added or increase in retirement (travel, entertainment, etc.).

Before I retired, something that I found helpful was to try to live on less and less (and save the excess for retirement), until my normal spending was actually about equal to what I could afford as a retirement budget.

 

[pb4uski]

A “top-down” approach would be to take your take-home pay for the year and reduce it for any additional savings you made – presumably the remainder was spent on living expenses. While this approach is a bit crude, it is better than a wild guess.

A more refined approach is to build a “bottoms-up” retirement budget looking at various categories of spending. There are plenty of forms and templates available that can serve as a guide. A broad approach is usually sufficient. For example, we have two vehicles and put about 10,000 miles a year on each. Vehicle 1 gets 20 miles per gallon and uses regular gas that averages $2.50 a gallon. Vehicle 2 get 23 miles per gallon but uses premium gas that averages $3.00 a gallon. So our budget for gasoline for the two vehicles is $2,554 which I round up to $2,600.

Many other expenses you will have good knowledge of based on past experience and some insights as to how your living expenses might change in retirement. Commonly, there will be changes for items previously obtained through employment may be purchased independently in retirement, such as health insurance, health club memberships, auto costs if you had a company car, etc. Assuming that your retirement standard of living is about the same as your pre-retirement standard of living then historical information on your spending for the couple years prior to retiring is a useful starting point. In fact, it is highly recommended that you “live on” your retirement budget during your last couple years of work, especially if your retirement budget is low in relation to your take-home pay to make sure that you are not being overly optimistic about the amount you need to live on in retirement.

In addition to typical expenses, you should also provide for major home repairs or improvements (such as replacing a roof, or air conditioner or furnace or rehabbing your kitchen or whatever) and periodic car replacements. Since such costs tend to be “lumpy”, typically such costs are estimated for a multi-year period of time and then converted to an annual amount that would then be added to the retirement budget.

 

[Independent]

Sure, this is a good approach. I started there. Lots of people here are more detailed, but you don't need to be.

I'm assuming that you've been consistently living within your take-home pay for a number of years. So your total spending+saving really is equal to your gross pay.

I'm also assuming that you are comfortable that your recent average annual costs of "rare but large" expenses reasonably represent what you'll spend in retirement.

I'll second MichaelB's post. That's a good list that may turn up stuff you haven't considered.
I'd add
"13. Do you have a plan for long term care expenses? (No, 'I'll just shoot myself' isn't a plan.)"

 

[Sunset]

I think you will find with all your extra time, you have a lot more time for longer or more vacations, so vacations will cost more when retired than now, although the per day cost may decrease.

I don't like the bottom up approach, as its too easy to forget about something, and pretty tedious to record every expenditure.

I wanted to know exactly what I spent last year so I realized I could do this:

I have 1 bank where I deposit all my money, then I take out money for stuff, and pay bills from the bank "pay bill" feature.
I don't use the CC account pay here now thing, as I want all in 1 place.
This will work even if you use the CC payment feature, as it still comes out of the bank.

Each year, I highlight and copy all outgoing money from my account and drop it into a spreadsheet. (bank lets me filter what I want to see which makes it easier)

Then I replace the savings (like transfers to another bank for savings, etc) with Zeros.
What is left is every dollar I spent on: cash withdrawls, CC payments, bill payments, Income Tax estimated payments, etc.

Then I only have to add in an estimate for the lumpy things like:
car replacement, and house repairs, health costs, vacations.

 

[Focus]

I'd say that instead of looking at current gross income, it would be best to look at current spending (once you have determined exactly what that is for a couple of years). You can probably get a ballpark estimate of that starting with your gross income, as you suggest, but estimates are not going to be as good as the actual spending values.

Then subtract expenses that may vanish or lessen in retirement (taxes, work clothes, etc.), and add expenses that may be added or increase in retirement (travel, entertainment, etc.).

Before I retired, something that I found helpful was to try to live on less and less (and save the excess for retirement), until my normal spending was actually about equal to what I could afford as a retirement budget.

That was my approach too. The biggest challenge is trying to factor in major one-time hits to the budget (both planned -- such as a car purchase -- and unplanned).

 

[sheehs1]

I found it easier to do a real budget, breaking it into monthly, quarterly and yearly expenses with a break out of expenses I can control (clothes, hair, vacations, etc. )
That allowed me to see a baseline budget needed to run the house, eat and live.

I still try to live within that budget but if I go over it's not a big deal as I bring in over 3 times what I spend and still save it. Can't seem to loose the LBYM thing!

You are 3 years away from your desired retirement. It is recommended that you test run your budget for a year or two "as if you were actually retired" before pulling the plug to see how realistic it is.

 

[walkinwood]

Its a good start, but go back and do it for a few years. It will give you a trend line.

Keeping track of expenses in broad categories is not that difficult if you use credit cards (paid off monthly of course!) and a program like Quicken to download transactions. Cash transactions are much harder to track.

We found that tracking our expenses changed our spending behaviour. We are now more attuned to bang for the buck in terms of satisfaction/enjoyment/fulfillment.

All the best.

 

[daylatedollarshort]

We found it helpful to use the Consumer Expenditure Survey numbers as a bench mark. We were able to cut lot when we looked at that and see where our spending was unusually high and not directly related to living in a high COL location. If other households can live on X surely we should be able to live well on X plus a bit more for items like more travel and adjustments for a higher than average COL city.

 

[mathjak107]

many times though median numbers only mean that is all folks have to work with like it or not.

it does not mean they like that lifestyle , it only means they are stuck with it and it has to work.

many studies do not track the same folks over time. older folks had smaller pensions, less ss , many have been depression children and always were frugal , few regular folks invested etc etc.

i will bet when the 60-70 group of today hits 80-90 they will show alot more spending going on then those 80-90 today.

the real question is how much of a spending decline in things is by choice and not by need or a mental thing.

 

[kitesurfer2]

I started planning my retirement several years ago. Every nickel I spend is put on a credit card and the card is paid in full before due. After several years of doing this, I know what my monthly expenses are with exception of big ticket items. I don't any more, but my usual practice was to sort out expenditures on the card statement and get a total cost of, food, entertainment, gas, recurrent charges and such. it's fairly easy to do this.

I never eat any fast food.
I never go inside a convenience store.
I never go shopping.

Those are all expenses that are needless.

 

[2B]

Unless you are planning on putting on sack cloth and live in a cave, your best way to estimate retirement expenses is to carefully track what you are spending now. You can deduct all the work related expenses but you'll also need to consider that some retirement expenses will grow. Added travel and recreation are frequently things that increase retirement costs in the early years.

W2R moved lifestyle down to support retirement assets. It's not quite the sack cloth and a cave but there was an effort to economize. You may find you need to do the same. Nothing like really watching where your money goes to make you want to cut out the waste you find.

I have years of Quicken data that has become the basis of what I describe as our basic budget. As we watched our spending over the years, we have used this information to reduce things that didn't provide "value" equal or above what we were spending. This basic budget lets us live indefinitely in our current house, doing what we do now with the assumption that eliminated work expenses will allow a moderate amount of recreation and travel. I then overlay additional spending for foreign travel and more luxuries based on our remaining assets.

Admittandly, I'm still in the theoretical stage. My retirement doesn't begin for 3 more days but the budget process is set. I'll see how it goes. I'm already having DW resist the level of foreign travel I'm trying to force her on.

 

[rodi]

I used both top down and bottom up approach. I knew I had a handle when my bottom up number matched my top down number.

For top down I took my GROSS income from all sources. I subtracted out 401k contributions (since those stop when you retire). I subtracted out SS and Medicare taxes. I subtracted out after tax savings. I subtracted out insurance premiums (since those would be changing.). Then I added in health insurance, OOP/Deductibles, and a sinking savings fund for big ticket stuff (roofs, cars, etc.). That gave me a number I was confident I could live with since it was basically what I had been living with.

For bottom up, my first pass missed some stuff... I knew this because I had my top down number... I had missed some of my kids expenses (I have teen boys.) That got it closer... but still not there... so I looked again and found I'd underestimated a few catagories. (I had quicken data - but hadn't properly catergorized stuff till this exercise.) ... I kept making passes on my bottom up budget till I was very close to my top down number. At that point I felt comfortable using this number for my retirement planning.

 

[daylatedollarshort]

many times though median numbers only mean that is all folks have to work with like it or not.

it does not mean they like that lifestyle , it only means they are stuck with it and it has to work.

many studies do not track the same folks over time. older folks had smaller pensions, less ss , many have been depression children and always were frugal , few regular folks invested etc etc.

i will bet when the 60-70 group of today hits 80-90 they will show alot more spending going on then those 80-90 today.

the real question is how much of a spending decline in things is by choice and not by need or a mental thing.

For us the Consumer Expenditure Survey numbers helped us identify areas where our spending was not optimized. Our goal was not to get to the same numbers but to use benchmarks to identify the most fertile areas of opportunity for potential savings. The number one item for us was hair salons. I switched from a downtown high rent place to someone at a strip mall with good yelp reviews and my hair turned out looking better for less money, plus I no longer have to pay for parking.

If your expenses are already optimized this will not help. Ours were not. We found a lot of ways to live better for less money using this comparison approach due to lifestyle creep and not price shopping enough. Our local dealer charges $900 for 60K miles service for my car and wouldn't budge on the price. I got it done for half price taking it to a lower rent city.

In fact I charted the price for the same service and the highest rates were in the heart of the metro area and rates dropped about $100 for every 20 miles or so out of town the dealers were located.

 

[Cobra9777]

I used both top down and bottom up approach. I knew I had a handle when my bottom up number matched my top down number.

+1 Do both and reconcile.

I suspect many people do a bottoms-up estimate only, but don't really have a solid historical base of actual expenses. So the result is incomplete, which is dangerous when deciding whether to ER. The tops-down is an excellent sanity-check to see if you've really got all cash flow accounted for.

However, that still leaves the question: how will spending change after I retire? In my mind, this is equally important and requires more analytical effort. Many people seem to gloss it over by assuming a few things will go away and help pay for more travel and health insurance. Maybe that's true, maybe it's not. I also think it's important to think about life events and how spending will change longer term as we age. And of course, inflation will impact each category of spending differently. IMHO, getting a solid handle on the total spending profile is the primary task in ER planning. There are no shortcuts if you want to be confident in your decision-making. Investments, AA, withdrawal strategy, taxes... that's the easy part.

 

[kaudrey]

I do a sort of in-the-middle approach. I start with gross income and then have separate line items for various larger expenses - taxes, healthcare, savings (taxable and retirement), housing costs (mortgage payments), car costs (not incl. gas, so this is buying and maintenance costs), travel, and capital expenditures (home improvement/repair). The difference between our gross income and everything that doesn't fall into one of those buckets falls into "living expenses".

In retirement, many of these larger items will go away or decrease (mortages/taxes), and the amounts for others (say, travel and healthcare), will likely rise. So I project out those changes.

I probably should add a "hobbies" line item at some point to account for golf and a few other things, but I haven't gotten there yet.

We still have 11 years to go, but by breaking out the larger items, it gives us a pretty good picture.

 

[Car-Guy]

I never really tracked my expenses until I started reading this forum and others that suggested it. So a few years before I retired I started tracking my expenses on a reasonably detailed spreadsheet. It was an interesting exercise but in our case it wasn't worth much to me. It didn't change my lifestyle before or after retirement. My main financial goals before retiring was to have zero debt and a 100% success rate on financial calculators like firecal and my own spreadsheets. Today, I don't track my expenses at all. No spreadsheets, no buckets, etc. However, I do track my total net worth on an annual basis and as long as it is going up, (or even staying even at this point) and we are living in the lifestyle we want, I'm not going to worry about it.