How Spending Affects Your Retirement
When planning for retirement, the primary focus seems to be on determining income, calculating savings, and projecting investment returns. And rightly so — those things are important. But I think a variable that often gets overlooked is spending.
Spending is an essential part of your retirement calculation. In fact, how much you spend determines how much you should be saving and how much you’ll need to retire.
The great thing about spending is it’s also the variable you have complete control over.
So, how much money do you need to retire?
While this is a straightforward question, there’s not a one-size-fits-all, simple answer. To arrive at an accurate number requires in-depth analysis beyond the rule of thumb that I’m going to share, but it should give you an idea of something to shoot for.
In order to retire comfortably, you’ll need to accumulate enough assets to cover 25-30 times your annual spending. Once you’ve hit that number, if you manage and invest your assets properly, you should be able to live off of those assets indefinitely.
For example:
If you spend $50,000 a year, you’ll need $1,500,000
$100,000 a year = $3,000,000
$150,000 a year = $4,500,000
You can see how important it is to know and control your spending. Every increase in spending significantly increases the amount of money you’ll need to replace when you eventually slow down or stop working.
Now, some of you may be thinking, “But when I retire I won’t be spending as much as I do now.” That may happen, but not likely.
Spending usually doesn’t decrease when you retire. Whatever expenses you may lose, other expenses will rise to fill their place. Yes, you may not have a mortgage payment anymore, but you’ll go on more vacations, spend more on hobbies, and spend more spoiling your grandkids. Healthcare costs also tend to rise.
While some statistics do show that the average person spends less in retirement, I would be willing to go out on a limb and say that’s due in large part because they’re forced to. Given a choice, I assume most people would prefer to spend more in retirement, not less.
If you do manage to decrease your spending in retirement, it should be the icing on the cake. I wouldn’t recommend reducing your spending as an integral part of your retirement plan. Having extra money is better than being short.
Estimating future living costs is tricky. Generally, your spending will increase over time. Thanks to inflation, the things you enjoy buying today are going to cost more ten years from now. Even beyond inflation, lifestyle creep and moving goalposts will take their toll as well.
Although I’m not the biggest fan of budgeting, I am an advocate for tracking your spending. You can’t ignore it. At the very least you should know what you spend on a monthly or yearly basis. And if you think you have an idea of what you spend without really monitoring it through an app or a spreadsheet, you probably don’t. When guessing, most people tend to underestimate their spending by about 10%-20%.
Spending habits are hard to break. Once you get comfortable living a certain lifestyle, it’s difficult to go back. After all, the best predictor of future spending is past spending. So knowing what your spending habits are today will help you set realistic goals for retirement.
The key is to not let your spending inflate to the point that it hinders your ability to retire. Learning how to live with less is a powerful financial lever because you have more control over it than things like income or investment returns. The person who makes less but needs less is more wealthy than the person who makes a lot but needs more.
Thanks for reading!