Realistically Determining how much You’ll Spend in Retirement

Approaching retirement, we all wish we had a crystal ball. How easy planning would be if we knew how long we were going to live, and how much prices were going to go up! Because of those unknowns, fear often keeps us working longer than we need to.

No one can wave a magic wand and turn the unknowns into certainties, but you can make some educated guesses and chances are, you are in a better position than you think you are.

The first step is to make a list of all your assets, present and future. What is your home worth? Do you have superannuation or retirement fund? Other properties? Shares? Savings? Do you have expectations of inheriting some money during your retirement?

Write all these things down and total them up. Now subtract any money that you owe personal loans, mortgages etc. We’ll call that your Net Assets. If you don’t have dependents, this is also your Nest Egg figure

If you have dependents, then you’ll need to decide how much money you’d like to leave them, assuming you live till you’re 90 or 100. Deduct that figure from your Net Assets. That’s your Nest Egg figure.

Now divide your Nest Egg by the number of years you may live in retirement. Given today’s life expectancy, you should allow to live into your 90’s. The result is your Annual Retirement Salary. (Don’t worry about adjusting for inflation: remember we also haven’t factored in future increases in property values, or future interest earned etc., so we’ll assume they cancel each other out).

If you’re looking at that figure in horror and think “I can’t live on that!”, let’s take a look at how retirement will change your spending habits.

Make a list of all the money you spend that’s related to work. Think about which expenses would reduce or disappear when you’re retired, for example:

– commuting expenses

– car costs will you drive less if you’re not working, so the car needs less work? And less petrol? Will you still need more than one car?

– phone bills what proportion of your home and cellphone bills are work-related?

– clothes, shoes, briefcases, jewellery how many of your clothes are bought for work or work-related socialising? Would there be less pressure to buy new clothes in your retirement lifestyle?

– eating out. Do you buy breakfast, lunch, coffee or snacks at the deli or Starbucks on workdays? Would you eat at home more if you weren’t working? Do you go to networking functions or throw dinner parties to get ahead at work?

You may be surprised how much of your weekly spending will vanish! Does that make your Retirement Salary start to look better?

If it still looks too small, then it’s time to start thinking of other strategies. Try to look beyond the obvious.

For example, I know one couple who moved out of their home and rented it out. The rental was steady extra income, and they made almost $15,000 on eBay by selling off their accumulated “stuff” (paintings, ornaments, unwanted jewellery, old books, surplus furniture etc). Then they put their remaining belongings in storage and jetted off to Europe! Sounds expensive, but actually it was no more costly than if they had rented a smaller home locally. They bought a small campervan (mobile home) and travelled around France, staying overnight at campgrounds.

This worked for them because they like the simple life. They were quite happy with a basic campervan, enjoyed cooking their own meals on a primitive stove and didn’t mind washing in the campground shower block. If they had insisted on a fancy Winnebago and expected to eat out at French restaurants, the scheme would certainly not have worked!

You may notice that I’ve included the value of your home in your Net Assets. Some of you may say, “but I can’t realise the value of that, I need something to live in”. Yes, you do, but you are more than likely sitting on the most money you’ve ever had. If you want to leave that money to your children, then that’s fine but does it really make sense if you have no one to leave it to? By all means, continue to live in the house if you wish, because its value will grow, which will help future-proof you: but at some point in your retirement, it will make sense to downsize: not just because of failing health, but because it will free up your capital. There are also a growing number of “reverse mortgage” schemes, whereby you can take a mortgage on your home for the final years of your life.

If, after doing this exercise, you still feel you can’t afford to retire, don’t think you have to resign yourself to slaving away for another x years. Start looking for a part-time job, one that you could continue past retirement age if you want. Or consider starting up a small business in the evenings and weekends, with the aim of turning it into your main income further down the track.