New considerations relating to the retirement calculator
I have been blogging on retirement issues for three years and I think I now realize that I have approached the question on ‘how much’ the wrong way. In thinking about building the nest egg for retirement, I get the sense that most of us are focused on what ‘the number’ should be when we retire. But after three years in what I call my ‘relaunch’, I have come to understand that the retirement calculator should be driven by how much you expect to spend each year in retirement.
What will you spend in retirement?
The question of how much I need for retirement may be the wrong question...or it might be the right question. I park that for a moment to reflect on my initial planning for a nest egg that would take me comfortably into my 90s. Some of us retire with a number that dictates what our annual spending will be up to a certain age. It is like an algebraic equation in which you are given one side and need to solve for the other side. Take ‘the number’ and predict the age you will live to, and that tells you how much you can spend. On the other hand, take the anticipated annual spend and that sets you up for ‘the number’.
News aggregator sites like Yahoo! are flooded with online content suggesting what amount you can retire on. But in my opinion, these articles mostly pontificate and don’t really provide an ideal roadmap to financial independence following a long career. There are just too many situational variables associated with the question “I want to know if I can retire”.
Can I retire?
An article by Christine D. Moriarty published on NextAvenue.org addresses the complexities of this very question and approaches the equation from the aspect of how much you expect to spend each year. When I was planning my retirement, my expectation was that my annual spending would not decline immediately after retirement. I planned for the likelihood that some overheads would reduce, but others would take up the difference. With more free time, your expenses may reflect you are filling that time with hobbies and travel.
So, in effect while I was focused on ‘the number’, I was really justifying the amount that I expected to spend annually in retirement. Together with my financial advisor I kept track of what my savings meant for the level of annual spending that could be supported. Ms. Moriarty puts proper perspective on this by suggesting that we can control our spending choices, but we cannot plan for those if we are not taking into consideration how much we are spending today.
The Moriarty article also differentiates between income and spending. Your spending pre-retirement is an important subset of your income pre-retirement. If you contribute between 20% and 30% of your after-tax annual income to the nest egg, the post-retirement annual spending needs to reflect this. So, if your after-tax income is $100,000 and you contribute $30,000 to savings, your spending post-retirement should be something in the order of $70,000 on this basis.
So, ask yourself how much you can afford to spend in retirement!