#25 When Can I Retire? (Step 1 – Spending)

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Do you know when you can retire?  

Do you know the steps required to answer this question? If you’re within 10 years of retirement, have you taken the steps required to answer the question for yourself?  Hint: The answer to the question “When Can I Retire?” Should be a CASH FLOW number that you’ll be able to generate from your investments, not an AGE number.

Over the next few weeks, I’m going to dedicate a series of articles to this critical question. I would encourage each of you to attempt to complete each step as I publish each article. I will plan on giving you at least a week between each publication to allow you some time to complete your analysis, and I’m available for any of my readers who would like some assistance on completing the analysis.  If my plan is successful, within the next 4 – 6 weeks you’ll be able to answer the question for your own situation!

At his point, My outline of the series looks like this:

  1. Spending Plan
  2. Retirement Income Plan
  3. Contingency Plan
  4. Putting It All Together – The Retirement Cash Flow Model

Today’s post will focus on the Spending Plan. How much will you spend in retirement?  While it seems like a daunting question, it’s critical that you have some reasonable estimates as the first step in your retirement planning analysis.  Until you have an estimate of how much you’ll spend, it’s impossible to know how much income you need after you quit working.  Through the suggestions posted here, I’m confident you’ll be able to create a reasonable spending estimate if you take the time to work through the detail.

To start, a word about methodology. While some online retirement calculators use “rules of thumb” (such as “assume 80% of your current spending”), my opinion is that the answer to the question of “When Can I Retire” is too important to leave to rules of thumb.  Therefore, I would recommend more time and consideration be given to the level of spending you expect to incur in retirement.  Even if you decide to use an online calculator, the more detailed analysis on spending projections will prove helpful, and increase the accuracy of your onlince calculator results.

Food For Thought:  I talked to a friend of mine yesterday, who had just asked someone what their “Biggest Learning” was since retiring a year ago?  He thought I may be interested for my blog.  The response:  I wish I knew how much money I was going to spend.  He had made the decision, and now realized his spending was higher than he thought.  Don’t end up in that situation – do your homework before you retire.  That comment is what initiated this new series today.  Take it seriously, no one cares about your retirement more than you.

Given the importance of your spending estimates, I suggest the following approach.  Start with a simple notebook (or spreadsheet, if you’re so inclined) and spend 30 minutes with your spouse creating general categories of spending that make sense to you. Don’t worry about the figures at this point, just think of high level categories that you’ll fill in later.  Below is an example of what things should look like at this point:


Once you’ve completed the broad categories, spend time in each category developing sub-categories to help in your analysis. Don’t forget those items which occur infrequently, but can be significant spending areas (e.g., house maintenance, car purchases), I call this my “Accrural” account.  Keep your notebook in a readily accessible place, and think about it as time permits over several days. Categories that you may easily forget on your “first pass” will likely come up in time. Consider this an ongoing analysis, and continually refine your categories.

Once you have your preliminary list of categories and sub-categories, add two column: “Current Monthly Spend” and “Estimated Retirement Spend”. You can either use monthly or yearly estimates. In my analysis, monthly seemed more intuitive, so I started there and later multiplied by 12 to create an annual estimate. Ultimately, when we get to Step 4 in this series, you’ll likely find working in annual “buckets” is easiest. For now, do whatever feels most comfortable to you as you begin to populate your spending categories with estimated dollar amounts.

Here’s an example (ficticious numbers) reflecting what you should have at this point, using the “Automotive” category as an example.  Note that I chose to capture new car purchases in my accrural account, rather than in the monthly automotive spending detail.  The following reflects less driving in baseline retirement spending (yours may be higher), as well as lower insurance/maintenance to reflect the elimination of one car in retirement:

Retirement Spend

In my case, I got very serious about this section of the analysis, as I feel it’s an absolutely essential data point for answering your “When Can I Retire” question. Therefore, my wife and I actually spent 8 months tracking every dollar we spent, and populated a spreadsheet with actual monthly spending by category. If you have the time and inclination, I strongly recommend this approach. Every time we spent something, we’d decide it if was representative of “After Retirement” spending. If not (for example, college expenses for our daughter), we adjusted the “Estimated Retirement Spend” column accordingly.  This gave us a good baseline from which to start our future estimates, and I found the value to be worth the effort.

After you get done with your “Current Spending” column, spend time thinking how it will change in retirement. For example, in my case my wife and I plan to spend extensive time traveling, so we increased our “Estimated Retirement Spend” column to reflect that. We also recognize that we’ll have to buy private health insurance to replace my employer sponsored plan, so we increase our monthly medical estimate to reflect the increase.

Also, for infrequent, but significant, expenses, we created a separate page to calculate a rough monthly average of items required over time, which I call our “Accrural” Account. For example, if you’ll need to buy a $20k car every 4 years, add $420/month to this category to account for that expense. A roof?  Divide estimated cost by 15 years, etc. This category will become an important element of your final plan, so spend some time getting a reasonable estimate to cover these types of expenses.  I also include car purchases in this account.

I’d also suggest you include a line for taxes, which is an important spending category many folks overlook when planning their cash flow requirements for retirement.  While this may not be applicable during your working years (you can simply work from your “net” paycheck), it will be important when you get into the future years and are responsible for tax payments yourself.

Finally, it’s time to expand your view through retirement. Add columns for each year in your life (we ran our analysis through age 95).  Think through how your life will likely change, and how your spending will change as a result (e.g., less travel, more health care, as you age).   Therefore, in the later years of our “Retirement Spending Model”, we have shifts between categories, and the total spend either goes up or down as a result.  It’s also a useful way to reflect how your cost for housing will change after your mortgage is paid off, if you’re carrying a mortgage balance into retirement.

Finally, I added an inflation assumption as a seperate column for each spending category.  For example, to calculate how an assumed inflation of 5% would impact health care costs, I simply added a column called “Inflation Assumption”, entered 5%, then multiplied each year’s total by that factor to automatically increase the following year for inflation.  For housing, we assumed no inflation since we own our home (I did use an inflation estimate for property taxes).

I encourage you to work on this type of analysis over the coming week.  If successful, by the time you’ve completed your work, you’ll have a spreadsheet (or notebook) which shows estimated by spending by year from now until the time you die.  While it may seem intimidating when reading all of the steps at one time in this article, I can assure you it’s a manageable exercise if you take it one step at a time and work through the logic as outlined above.

It’s a critical first step in determining “When YOU Can Retire”, and I encourage you to give it a try.

PS – I’ll be traveling extensively this week on business, so expect a slow down in the publishing pace until I return.  Have a great week!


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  1. Fritz: this is really great and along the lines of what we have done as well, only not as detailed in some areas. The categories are very close to what we have and we document all the receipts as you stated. We have been doing this for a few years so we can see overall the variance in the categories year over year with what transpired in the year with such things as gifts to the kids etc. Don’t forget the “tithe” category as that’s also an easy way to see if you missed a week at the end of the quarter.

    1. Kirk, thanks for the input, pleased to get some confirmation that it’s a proven methodology. Yes, we do have a category for Tithe under gifts. Many churches now allow automation of ACH transfers for the tithe, which is how we’ve set ours up. I’m a big believer in automating as much as possible! Thanks again!

    1. Christine – thank you so much for reading my blog!! You’ve got a smart brother – he’s great at this stuff! Welcome to The Retirement Manifesto!

  2. Just ran across this post. Great advice! Do you have any thoughts on how to incorporate a tracking service like Mint.com in this process? Using Mint I already do categorize each expenditure, though it doesn’t incorporate anything like a post-retirement projection. Mint does summarize for me what I’ve spent over the past couple of years, and where I spent it.

    1. Randall, thanks for your comment. I like Mint as well, and you raise a good question. I used Mint as an audit on my numbers (which I did manually), but I think Mint could do it if you pre-defined some pre- and post- retirement categories and reclassified as appropriate. It would be a bit of work, but it should give you what you need if you stay current with any required reclassifications. I’m open to any other ideas readers may have??

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