Your Retirement Budget Probably Won’t Look Like Your Current Budget
One of the laziest assumptions in retirement planning is that you’ll spend roughly the same amount in retirement that you spend today.
You might, but I wouldn’t bet your retirement on it.
I see retirement plans built this way all the time. Take what you spend now, make a few adjustments, add something for healthcare, and call it your retirement budget. The problem is that a retirement budget can look very precise even when the assumptions behind it are wrong.
Your life is about to change in one of the biggest transitions you will experience. So, it’s reasonable to expect your spending will change too.
Start with the life, then build the budget
Some people retire and immediately start traveling more. They finally have the time for the trips they kept putting off while they were working. Flights, hotels, eating out, and bringing family along can make the first several years of retirement more expensive than the years before it.
Other people do the opposite. They retire, stay close to home, and spend far less than they expected.
Housing can change the numbers is a significant way as well. Maybe the mortgage is finally paid off. Maybe you downsize. Maybe you keep the house you love, along with the payment and nothing changes.
Then there is family.
I see plenty of retirees who want to be generous with their kids and grandkids. Maybe they want to help with college, a wedding, a first house, or step in when somebody they love goes through a rough stretch. If generosity is important to you, that belongs in the retirement budget too.
Healthcare may change as well. Some households spend far more than they expected. Others don't. You can plan for it, but you can't know exactly what your health will look like 15 years from now. Your healthcare choices can also affect where you receive care and how much flexibility you have, especially once you reach Medicare age.
This is why I use "How much do you spend today?" as a useful starting point, but not the end point.
What will Tuesday look like?
I think a better retirement budget starts with a much more ordinary question.
What are you going to do all day? Where will you live? How often will you travel? Who will you spend time with? Will you eat out more because every day feels a little bit like Saturday? Are you going to help the kids? Do you want to spend several months somewhere warmer than Wichita (or cooler)? Are you planning to stay in the same house for as long as you can?
Those questions sound less precise than asking whether you need $7,000 or $8,000 a month.
However, I think they may be even more important.
A retirement budget is simply the price tag attached to the retirement life you want. If we haven't figured out the life yet, the number is mostly a wild guess dressed up an Excel spreadsheet.
Retirement spending probably won't stay flat either
There is another problem with trying to find one perfect retirement number.
Your retirement may last 20 or 30 years. Why would we expect you to live exactly the same way for all of them?
You may travel hard for the first 5 or 10 years. Later, you may travel less. Housing costs can change. Family needs can change. Healthcare can change. The things you care enough to spend money on can change.
So I would be suspicious of any retirement plan that says, "You need exactly $X per month for the rest of your life."
The goal is to get specific enough that your plan reflects the life you are reasonably trying to build, then keep adjusting as life changes. That takes more work than multiplying your current spending by some percentage.
Real life just isn't that neat.
Because the point of a retirement budget is not to predict every dollar you will spend for the next 30 years. It is to make sure the money you have can support the life you are actually trying to live.
So, before you ask, "How much will we need in retirement?" ask yourself something deeper:
What do we actually want retirement to look like?
If you cannot answer that yet, the budget is probably not the problem.
*Disclaimer: This article is for educational purposes. It is not personalized advice, a recommendation, or an offer. Review your choices with a qualified financial or tax professional before acting.
