The answer to this question is easily the most important piece of information to help a financial planner help you plan for retirement.
A well-prepared pre-retiree has a spreadsheet or uses computer programs like Quicken or online services like Mint to keep track of their annual expenses. A thorough analysis of actual data will help lead to reliable results. But who are we kidding? Most people don’t have the detailed records needed to help design a spending plan (absent accountants, many engineers and a few detailed oriented people).
As we’ll see though, even those with great records and a good plan often discover their spending in retirement doesn’t go as planned!
Over the years, many studies have suggested that people spend about 70-80 percent of pre-retirement income during retirement. That seems to make sense, as once you aren’t working you aren’t paying into the Social Security System or Medicare (7.65% of gross pay). Also, if you were a diligent saver you were saving 10 to 20 percent of your pre-tax income and that will cease.
But, rules of thumb like these are inherently dangerous. As reported in the Wall Street Journal by Glenn Ruffenach, a 2017 study by the Employee Benefit Research Institute found that almost one-half of retirees said their health care expenses were higher than anticipated and more than one-third said their other expenses were also higher.
The impact of having extra time tends to lead to more spending than less. Those with a “bucket list” like to empty it fast. Early retirees tend to have new grandchildren and will spend money to see them and buy them gifts. Or set up college savings plans for them-which can be a very good idea.
Often retirees relocate early in retirement, whether it be to a warmer climate or to be closer to family. Moving costs money. Are you going to move to a state with a higher state income tax? If so, better have some more savings before retiring.
How do you plan if retirement is 20 to 30 years away? Spending habits are still ultra-important to consider. Lacking detailed data (and even with it planning 20-30 years away is very difficult for expenses) saving toward the 70-80 percent goal is admirable. Start with saving 20 to 30 percent of your income if you can. But as you near retirement, start keeping records so you can focus your plan accordingly at the time.