How To Determine How Much You Want To Spend In Retirement

A very warm welcome to the early retirement show. The show dedicated to helping you navigate the nuances of an early retirement, a non-traditional retirement. Now let's get right into the episode so we can learn how to retire early.

Welcome back to another episode of the Early Retirement Podcast. I am your host, Ari Taublieb. I hope you've been enjoying the podcast so far. Today's episode is a fun one about how do you determine your retirement expenses? What am I going to spend in retirement? How do I really know what I should be planning for? Am I not going to have enough? Am I going to be over saving? 

Which Yes, I can tell you from a fact that is a real thing that people can over save for retirement. And some of you might be thinking there's no way I can spend boundless amounts of money, you have no idea already what I'm capable of? And I'm sure you can, but there's still a way of over saving, in the sense that could you do more today? 

What are you sacrificing to do that future saving. So some of these thoughts that I'm going to be flushing out today want you to really at least takeaway, that when it comes to retirement expenses, you don't have to feel you need an exact number, meaning you don't have to know exactly how much you're going to spend every year in retirement. No one ever does. The goal of this is to start thinking about calculating what you want to spend. 

And if lifestyle is going to be a whole lot different. Are there domestic trips you want to take in retirement? Are there international trips? Are those going to cost a whole lot more than domestic trips? Do you want to get an RV? Do you want to say you know what, I don't really love travelling but really want to be able to see my kids wherever they are. 

Maybe they're in college, or maybe they're just switching careers around the country, whatever it is, how can you have the freedom to do that. That's what today's episode is all about. Once again, if you have not already checked out the YouTube channel, please check that out in the description of today's episode, you will see all of this and more on YouTube. And I'm doing that because sometimes I've got a few comments from you that it's easier to follow along with numbers. 

So trying to make some content, especially with a financial podcast, as you're hiking or maybe you're on a walk or a bike ride. Sometimes it's gonna be wonderful. I certainly hope it is. But other times I know with the number, which is why I don't try to go too granular. Now, I want to certainly give you feedback that you can take away, that's helpful. But I want to at least to be something that you can look forward to every week. 

So that is my goal is to not make retirement planning intimidating to make it fun. And I think it's fun. But ultimately, I'm a retirement planner. So of course I do. If not, that'd be weird. But this is what I love doing what I hope at least is to give you a few nuggets each week that you can go okay, I'm thinking about that a little differently. Yes, I thought about spending but not with that garden guardrails approach, or Yes, I thought about this, but I don't know how my tax strategy is going to relate to that. 

I never thought about doing a conversion or just those types of things that make you think differently on the financial side. But on the non financial side, it's okay, what else I could be done sooner? 

What would I really do? Because some people will tell me I want to retire early. And then I'll say great, what does it look like right now? What are you doing in retirement, and they'll say, oh, my gosh, I really haven't thought about it, I think I'm just going to keep working. And I'll go great, at least what I want to do is give you the peace of mind so that when you go to work, you know if there's a bad day, you do not have to. So at least that kind of confidence, and not kind of but that confidence. So that's what I'm going for. Now, today's episode is about retirement expenses. 

And what I want to start with is people tend to anticipate what their expenses will be in the first year of retirement. And they will inflate that number every year by a historical inflation rate of your choosing. Now, please know and how could you unless you did the research, that the cost of goods and services that retirees spend money on, for example, medical care, that increases faster than the goods and services of individuals who are not in retirement. So many people have a very clear sense of what retirement is going to cost. But the inflation aspect of retirement expenses is very interesting and often overlooked. 

Just as another brief example, let's assume you're doing some retirement planning, and you say, You know what, I want to plan on 3% for inflation, just for historical purposes. That's what we use personally as a firm. Now I know in the past, meaning in the much recent past, it certainly has not been that but that's the historical average. Well, if we are planning for Social Security, social security, on average is 2%. So we want to make sure that Social Security is being considered at 2%, not 3%, knowing the average of inflation, and you might say Ari What's that 1%? I mean, how big of a difference could it really make? 

Well, in the latter years of retirement, you're talking about a significant difference. So it matters. Um, now let's hop into this when it comes to having a clearer sense of your monthly expenses. A one off thing might seem like it's gonna throw a big curveball into your budget, and it certainly can if there's not a plan, so ensure to plan for one time expenses, for example, property taxes, or a car in retirement or things like that, that are one off expenses. Let's assume that you go with a basic example. I want to spend $5,000 Every month after taxes adjusted for inflation, great if that's what we want to spend, are we going to go into retirement with a mortgage. 

Let's assume there's no mortgage okay, but there's still property taxes. So let's make sure we count that. Now what if you're working today, you're probably contributing to a retirement plan of some sort, call it a 401k or 457. Well, that might go away. In fact, it will go away, most likely. And so because of that, we want to make sure that we don't factor that in. Well, now your net paycheck you're living off today, you might not need to completely replace that. And that surprises people, oftentimes with a little bit of a smile. But my job is not to always produce that. My job is to show you actually how that impacts your retirement in future. 

Because what we really want to know is, are we going to never run out of money and meet our retirement goals. That is the ultimate question. And so specifically, with these one time expenses, it can often throw it off, if you're going I'm planning on 5000 a month, but there's this one car we're gonna get, and we're really excited to get it. And that's 65,000. And you don't want to finance it just as an example. Well, that's gonna throw off the budget. So have some flexibility in that budget for margin for error. If you haven't planned your expenses in depth, some people like to get a spreadsheet and go super granular. I love doing that with clients, especially when they're nearing retirement. But I don't recommend doing it when you're certainly far out from retirement. 

Because now yes, it can provide peace of mind. But oftentimes, it just causes complexity, and people then don't take action. So I tend to go with the simple approach of have a general sense of what you want to spend, then before you retire, let's certainly get down in the dirt, which I love doing. The last point on this, understand your goals for travel and entertainment, how many trips you want to take per year, not just Yes, I want to travel internationally or Yes, I want to take an RV and go around the country. How much do you want to spend when doing that? Do you want to do what's almost known as bougie travel? Great, if that's what you want to do? 

Let's factor that into the budget. It's not right or wrong. It's just do you want to do that? Do we have the assets to support that? The next one is when it comes to travel, is it domestic travel, international travel? And on top of that, are we also travelling to visit children? Are we also travelling on call it one big trip per year with the whole family and who's funding that? So those are the one off expenses that we want to make sure we're consider. 

My favourite example. And you've probably heard this from a podcast or if you're a current client listening to this, because I know a few of you do, the retirement smile analogy. Let's think about that. Think about a smile. Well, if you're on the upper left of that smile, that's what retirement is when you begin meaning that's when you have your energy and your health and you're thinking about it and you're going great, let's do these fun things. Well, think about that smile. Now we're going down that little smile. 

Well, retirement expenses are not linear, meaning what you spend at the beginning of retirement might not be the same in the middle, not even at the end. But the retirement smile is a good way of thinking about it. Because as we have our energy and health, we tend to spend more, do more, travel more, give more. Now, I know that was a mouthful, but then we start to spend less just because that's what life does. And that's just historically speaking, some people smile might have a frown in the middle, maybe there's a little blip here and there, but want to give you a general sense. 

And then in the latter years of retirement, well what happens? Well, medical expenses come up, or maybe charitable giving. Or maybe you say, You know what, I really always wanted to buy that one car. Let's do that. So things right before and I don't mean to get dark here. But before you may pass, you know, we want to be considering that. Because it's a horribly dark topic, if you're thinking about it in the lens of what can we do more while we're here? How can we spend more? How can we give more the fun stuff that we really love talking about? So that's the retirement smile. 

And it's best explained through Michael Stein's book, The Prosperous Retirement Guide To The New Reality. He talks about retirement in three phases, the Go Go years, the slow go years and the no go years. So think about that when you're thinking about this retirement smile. Now another example for you all because you know, that is my thing is let's assume that, you know, there's a mortgage in retirement. 

Well, what if we look at a basic example, if $80,000 is needed to supplement other income so that you can have a total of $120,000 per year, meaning? Let's assume you $120,000 per year, and you have a pension that generates 40,000 or 80,000 is coming from your investments? Well, if the mortgage is not paid off, where is that going to come from? Is it current cash flow? Is it going to come from your investments? 

We certainly want to factor that in. And so those non portfolio income sources, the not investment income sources is another way of thinking about it. Those are certainly things we want to factor in. It all relates to your retirement plan. And then of course, which brings me to my next point, where will income come in retirement?

So when it comes to feeding your retirement expenses, how are we going to do it? Is it a pension? Is it rental income? Is it Social Security? Is it investments? Is it a little bit of part time income? Is it all of them combined? Who knows but that's what the fun of retirement planning is? So wanted to give you a basic framework. How do you think about retirement expenses? It doesn't have to be perfect.

Think about what expenses you have today, what expenses you're going to have in the future and they often are very, very different. And don't freak out about getting it exactly right. But have a general sense of what you want to spend. Will there be a more get you in retirement? How many years? If so, what do you really want to do in retirement? What are some of those trips? What do you really want to do? And then of course, health care, long term care? Are you planning on that? Do you have a policy?

Are you self insuring all of these other things, what I call the additional considerations? Of course, we don't want to forget anything. So if you want to build a retirement plan, I'd be more than happy to help you. This is what I love to do. I am the youngest financial planner, who loves retirement planning. I have the best job in the world. No one can argue with me on that. And I will see you all next Monday. Oh, once again, I almost forgot. If you want to submit your question to my website. I will certainly answer that in a future episode.

Earlyretirementpodcast.com/submityourquestion. All right, everyone. See you next Monday. Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcast.com. That's earlyretirementpodcast.com. And you can go ahead and submit a question that I'll look to answer in a future episode.

Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it. And I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.