How much will you spend in retirement?

I may be an outlier on this, but I knew several years out when my retirement date would be.  It was on my own terms and earmarked to be in my late fifties so that I could enjoy a change of pace.  My 35+ year career as a hospitality development professional was rewarding, but it involved an inordinate amount of travel.  I also felt that my learning curve was flattening, which, being in my mid-fifties, did not enthuse me.

So, I embarked on a plan to migrate to what I call my ‘relaunch’ and part of that involved an identification of what my nest egg and annual expenses in retirement could be.  In the three years running up to my retirement date (or ‘relaunch’), I documented in detail our household expenditures on a monthly basis.  I included all outflows in that equation, except income taxes and savings.  My analysis represented a three-year historical track record of what we were spending on living expenses.

I think our household of two had been reasonably frugal to that point – we did not buy a lot of toys, economized on travel and leveraged my travel rewards quite a bit in this regard.  This meant we were able to save at least 20% of annual income in the last years of my career (from a mixture of savings programs that comprised after-tax, pre-tax and employer contributions).  What I gathered from my analysis is that our lifestyle expenses might not change, mostly because we were still relatively young.  We also did not plan to move from the DC area.

I am now in my seventh year of retirement, and our pre-retirement assessment has been reasonably close to the reality.  We are definitely not spending less than we did pre-retirement, but the composition of expenditures has changed substantially.  To begin with, and because we are located in an urban center, we have become a one-car family, with the corresponding reductions in insurance, gas and maintenance of the second vehicle.  I also no longer work in an office which has contributed to savings in dry-cleaning, transportation and eating out.  We also worked to reduce our overhead by wiping out debt, particularly the home mortgage.

Those savings are taken up by treating ourselves to more travel.  Because I cannot leverage the travel rewards nearly as much, we are having to spend more on airfare and hotels.  We also have relaxed a bit on the economizing relative to travel, feeling we deserve a bit of pampering for 35+ years of discipline.

Health care costs have changed for us as well.  Through my job, we used to be on an employer sponsored plan so we have had to migrate to the US Health Insurance Marketplace (aka, Affordable Care Act) which has added to our monthly expenses.  Fortunately, we are very healthy (we have invested more in gym memberships), so the long-term care equation has not entered our realm as yet.  Having said that, this could be an impending worry as we age into our 70s and 80s.  I do have to confess that my analysis and planning assumed our sustained good health would be a given for the foreseeable future. I may have to reassess this part of our plan.

 A key to our situation as it relates to annual budget is that the returns on equities since my retirement have been on average in the mid-teens.  We are fairly equity heavy in our portfolio, so have benefited from that trend, which has translated into an unplanned gains. That trend could also easily change, resulting in a reversal of fortune that translates into economizing more.  Because we monitor cash flow and resources on a monthly basis, it should be fairly easy to pivot.

If there are any learnings that would benefit readers of my blog from this experience, it would be that spending needs in retirement will depend on what you have in your nest egg, where you plan to live, which lifestyle you choose to adopt, expected lifespan and the state of your health.  These latter two points are the most precarious as we boomers are prone to longevity without clarity on the prospects for long-term care.