How Much Will You Spend Each Year in Retirement?
This simple rule will determine how much you can expect to spend in retirement.
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Question:
Last week, we talked about vampires and how they can afford to lead such extravagant “lives.” Of course, it’s easy when you’ve been saving for 530 years.
You and I have a shorter time horizon. After all, we hope to stop working one day and retire. When we retire, the goal is to enjoy life, right? And that takes money!
But how much?
How much money you need to have saved when you retire is based on how much money you expect to spend during the 20, 30, or 40 years that you are retired.
Do you know how much you will spend each year when you're retired?
I don't either, but there's a helpful rule we can use to estimate it. It's based on how much you earn during your last years before you stop working.
The assumption is that in your last years before retirement, you make enough money to not only save for retirement, but also to pay taxes, buy food, pay your mortgage, and maybe take a vacation or two. Once you retire, you'll no longer earn a living, but you'll still buy food, pay your bills, and maybe take a vacation or two.
Suppose that in your last year before retirement, you earned $100,000 and that this money was enough to support your lifestyle that year.
Based on that $100,000 salary, how much do you expect to spend each year in retirement? To keep it easy, let’s ignore inflation.
- $100,000
- $1,400,000
- $70,000
- $140,000
Answer.
As I mentioned above, there’s a general rule for how much you should expect to spend each year in retirement. It’s a very basic rule with a lot of assumptions, but it’s not a bad guide to use as a baseline.
Before I tell you what it is, what’s one big expense that you no longer have to pay once you retire?
Income taxes! Well, income taxes from that job. You’ll still need to file and pay what you’re legally obligated to based on other income and capital gains.
The general rule is that you pay around 30% of your income each year in taxes and work expenses. Once you retire, those costs go away.
So, based on a salary of $100,000, we can estimate that you would spend $70,000 per year on food, clothing, shelter, and ticking off those bucket list activities.
That means the answer is $70,000. Answer 3.
Next week, we’ll look at how much you need to save in order to spend $70,000 a year in retirement.
