How much can I afford to spend once I stop working? We’re willing to bet this is likely one of the most significant questions that has crossed your mind when planning for your retirement. Or at least, we hope so.
Here at Consolidated Planning, our planning philosophy focuses on first protecting today to ensure your tomorrow, whatever that may look like.
Understanding your future spending needs to ensure you’ve saved enough and can maintain your desired lifestyle. Here’s how you can approach this essential aspect of retirement planning:
Understanding Replacement Ratios
Your income replacement ratio is a simple way to determine how much income you may need in retirement. This ratio compares your pre-retirement income to what you’ll need in retirement. In other words, it tells you what percentage of your working income you can expect to replace with your retirement income to maintain your standard of living.
Ironically, high-income earners may need a lower replacement ratio because more of their working income goes toward retirement savings, taxes, and job-related expenses. Therefore leaving a smaller percentage of total revenue for essential expenses and lifestyle. However, Social Security will cover a smaller percentage of this pre-retirement income.
For example, a household earning $200,000 may need approximately $140,000 – $170,000 in retirement income to maintain the same living standard enjoyed while working.
With that being said, moderate—to lower-income employees often need a higher income replacement ratio as this pre-retirement income is mostly needed to cover current spending. However, a greater percentage of this pre-retirement income will be covered by Social Security benefits.
Some retirees may want to plan on a 100% replacement ratio or more.
To maintain your living standard, according to Bankrate, you could need anywhere from 10x to 25x your final salary in retirement savings and future income benefits. We know this sounds like a lot but this is a prime example of why (adequately) planning for your retirement is so important.
Should You Plan To Spend Less In Retirement?
While you’re likely already assuming your expenses will drop significantly, it’s essential to evaluate where these reductions are likely to occur and where they may not.
- Retirement Savings: One major (and obvious) shift is that you will no longer be saving for retirement, freeing up a portion of your income that was previously allocated to 401(k) contributions or other investments.
- Job-Related Costs: Expenses like commuting, work attire, and daily lunches will no longer be necessary.
- Taxes: Your tax bill may also decrease, especially if your income is lower in retirement and you strategically withdraw from tax-advantaged accounts.
- Debt: At a typical retirement age, significant fixed obligations like mortgages, loans, and the cost to raise children, for example, are no longer an area of concern for your dollars.
Despite some of these expenses dissipating, you might find that others increase. For instance, you may spend more on travel or leisure activities since you’ll have more time for these pursuits.
Depending on your interests and lifestyle, these lifestyle costs can become a significant part of your retirement budget. You may find that you allocate your monthly spending differently, but your overall spending level stays the same.
Other Factors That Affect Retirement Spending
While replacement ratios are a great starting point for your planning, they don’t cover all aspects of retirement spending. Here are other areas for you to consider:
- Retirement Goals: List what you want to do in retirement, such as traveling, pursuing hobbies, or exploring new interests. Estimate the costs associated with these activities.
- Potential Challenges: Consider possible contingencies, such as healthcare needs, supporting family members, or unexpected home repairs. These can significantly impact your retirement budget. Consider setting funds aside in reserves to cover these potential expenses.
- Lifestyle Changes: Your spending patterns will likely shift in retirement. For example, you might spend less on work-related travel expenses and more on leisure travel. Adjust your expectations to reflect these changes.
Between your replacement ratio and a detailed list of goals and potential challenges, you can paint a clearer picture of your retirement spending needs.
Are You Ready To Retire?
Deciding whether or not you’re ready to retire is a big decision. And determining how much you can spend in retirement involves evaluating various factors and your personal circumstances.
Maximizing your retirement means ensuring your plan aligns with your retirement goals, giving you the necessary confidence to [actually] take action and retire.
To figure out your retirement spending, talk with a financial professional at Consolidated Planning to help you craft a retirement strategy right for you.
Exp. 3/2027
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Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of James M. Matthews and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
