It's hard to predict how much you're going to spend in retirement, but there's some really good
information out there, and using that you can take a look at what previous retirees have experienced
(those who have gone down the road before you) and you can get some tips on what you might
expect as you go into retirement. So we will look at some of the traditional or the most common ways
of estimating your spending, and this is what you might find in a lot of popular retirement
calculators, or in the so-called four percent rule, which is not really a rule, but it's a
historical research finding. Those things can potentially cause problems and cause you to miss
out on some enjoyment, so we want to avoid that. We'll also get into some actual spending data,
so what are people really doing when they spend in retirement? And some surveys and some other
research that can help you understand what your spending might look like. A traditional way of
looking at your spending is all about maintaining purchasing power, which is very important,
you need to keep up with rising prices and be able to maintain the same standard of living because
if you don't factor in inflation then that can erode your purchasing power and make it harder
to afford the things that you want and need, so most calculators are going to do a fixed increase
in your spending each year and the four percent rule, for example, does the same thing, it just
gives you an increase in whatever inflation was for that year, and that continues on indefinitely,
and for an oversimplified example we can see something where you just take a round number
$100,000 for example and that just increases by an inflation amount every year until the day you die,
but it might not necessarily make sense to use a spending plan that just marches on blindly every
year with inflation because the reality is you might experience some different spending patterns
in retirement. One example of that is David Blanchett's retirement spending smile, and
this gets its name from the smile shaped spending curve that you might see throughout the lifespan
of a typical retiree, so if we over simplify what this comes from it's that retirees might, or in
his research they did tend to spend at a rate that was slightly less than inflation it was inflation
minus one percent so this can get quite technical and in the weeds but what happens is over time,
those health care costs typically increase and at some point the line comes back up giving you that
smile shaped chart that's an over simplification, of course, but if you look at maybe an alternative
to plain old lock step inflation adjustments you might find that that's closer to the reality for
some people, and in fact, when I adjust people's retirement projections using the retirement
spending smile for example that often helps to improve their chances of success another spending
pattern is the go-go slow-go and no-go years and this assumes that right after you retire you're
at your healthiest and you're very eager to do all of those things that you've dreamed about
doing in retirement, so you go ahead and take those trips and spend a lot of money on travel
and entertainment and all the other things that you might not have had the time to do during your
working years at some point we shift from that go go phase into a slow go phase and that might be
because you've done a lot of the things you want to do and you might be getting older and have less
energy or desire as a result your spending can decrease during that phase and then you go into
a no-go phase and that is where you're going to be a lot less active a lot less money goes towards
travel but you still have some entertainment and leisure but most importantly those health
care costs tend to pick up and that mirrors what you see with the retirement spending smile in the
no go phase you're going to spend a lot more on health care and a lot less on other things. By
the way, I'm Justin Pritchard, and I help people plan for retirement and invest for the future. So
in the description for this video you can find some of the information we're talking about,
links to these articles as well as some other resources and calculators and tools that can
help you as you do your own retirement plan. So, how much will you spend in retirement? Well there
are a couple of different ways to estimate that and try and arrive at the number that should be
your spending target we have a couple of them shown here one is an income replacement ratio
that's often something like eighty percent ninety percent even a hundred percent especially in the
early years of retirement or those go go years but it might not need to be 100 of what you're earning
during your working years and that's because you're no longer going to be paying payroll taxes
in retirement, you might not be saving money each year in retirement accounts because you're already
retired, and if you commute to work, for example, you no longer have those expenses that said,
you will have more time on your hands, and so the question becomes are you going to do things that
cost money and how does that compare to your pre-retirement spending I've got other videos
that talk about these techniques in more detail so we're just going to keep it brief on that the next
is if you look at your actual spending and there are a couple of ways to do this depending on
your preferences and your patience and how much information you have available so a bottom-up
approach is going to be where you actually track your spending and you look at where your money
goes so how much goes to housing how much goes to utilities food including the grocery store versus
dining out and any other types of food you're essentially going to tally up everything that
you spend money on and assume that that might be similar to what you spend in retirement
now there will be some changes again you might not commute anymore or you might even have bigger
changes like at some point the mortgage gets paid off or you stop supporting children or something
like that but you might assume that your spending is roughly the same as what you spend now although
it could make sense to add in things like vacation spending the challenge with a bottom-up approach
is that it's assuming that you have everything because it seems very detailed but you might
miss things so it can seem very precise but it might still be wrong and that can be problematic
a different way to do it that might catch some of those things that you often miss is a top-down
approach and that's going to be where you start with your income you know how much you're bringing
in and you subtract out any taxes and any savings and other things that you don't actually spend
money on and the amount that's left over is what you could assume is what you actually spend on
things and you don't know how much you spend on each thing but you know that the money goes
somewhere it didn't go to taxes or into a savings account so it went somewhere and again you might
assume that you'll continue to spend at a similar level but maybe you need to make some adjustments
again like maybe additional vacation spending it can also make sense to assume that that's going
to change so if you subscribe to the model of the go-go slow-go no-go years, those vacation
expenditures could be high in the early years of retirement and then maybe you want to assume that
those taper off at some point although healthcare spending should pick up with either technique
whether it's the top down or the bottom up you want to make sure that you catch all of those
infrequent expenses so those might be annual costs maybe you pay your property taxes each year
or maybe you buy a new vehicle periodically those are things that you might not catch if you just
take a snapshot of one year's spending or even a couple of months of spending it's easy to miss
those things so be sure to add those in as you do this exercise and a third technique for estimating
your spending is a lifestyle range so you might pick a round number a lot of people like to pick
a hundred thousand dollars for example and say I would be comfortable if I'm able to spend that
the challenge is it's not very close necessarily to what you actually spend and what seems to
happen, this isn't always the case, but what seems to happen is people often pick a number
that's too high so it might be more money than they need but it seems like a nice round number
that would be comfortable unfortunately if you pick too high that can be problematic because
you might need to save more each year you might need to work longer to make the numbers work out
and that can be problematic if you don't get to enjoy life as much as you would hope here's just
one example where we say somebody's currently earning 100 but they save some money in a 401k
they have some payroll taxes and both of those are going to go away once they stop working
you will still have income taxes in retirement the question is going to be
how much exactly but you don't necessarily need to spend and you probably today don't currently spend
a full 100 000 even if you currently earn 100 000. Now time for a friendly reminder that this
is just a short video and it can't possibly cover everything and it's not made with any knowledge
of what you have going on, so please do a lot more research, please talk with professionals,
talk with a financial planner talk, with a CPA and an attorney, and that way, you reduce the
chances dramatically of having any problems. So hit pause read that if you need more time,
and we'll move on. So where do retirees actually spend their money what do other people spend their
money on and we have some nice information that can help paint the picture that might be useful
for you might make some light bulbs go on for you this is some anonymized data that looks at
actual transactions in people's bank accounts so they can't see exactly who spent what on what but
they categorize it and in the aggregate they're looking at where money goes for people who are
at least partially retired so they might have some retirement income or they're spending from their
assets by the way this does show households with investable wealth of $1 to $3 million so that's
relatively wealthy most people don't have that much so this might not be exactly where you fall
in the world but it can at least help paint a picture of what it looks like for some people
in retirement what you'll notice not surprisingly is that those health care costs do increase over
time and it might not be as much as you think especially once you're on medicare the costs
can be somewhat under control especially if you don't have major health issues maybe you have some
supplemental or other types of coverage to help manage those costs and charitable giving increases
as well but things like transportation and travel tend to decrease as a part of your spending over
time and going back to the retirement spending stages you can almost see those here where the
spending starts out high in your 60s but then it declines and at some point it tilts back up again
and that is primarily going to be because health care is catching up with you by the way if you're
looking at that housing category and that seems to almost increase later in life it's not something
that we can necessarily know for sure but some people might speculate that that has to do with
maybe home modifications for those who want to age in place or maybe they're getting some long-term
care at home so that can contribute to this massive housing category and looking at data from
the BLS this might be more typical for the average household you can see some similar patterns here
so it's about 64 000 of spending per year for those age 55 to 64 maybe approaching
or just beginning retirement once they're above 65 that decreases to about 52 000 and of course
over age 75 it's even lower interestingly on this one you do see some decreasing
transportation costs but you don't necessarily see quite as much of a tick up in the healthcare costs
in the consumer expenditures survey so that showed us how much people actually spend whether they are
among the more wealthy or if they're typical households so let's get into some logistics so
after a lifetime of savings it may be foreign to you to stop putting money into accounts and
start taking money back out so how exactly do you do that again we're going to cover a lot of
ground in this video but this will be just a brief treatment of the topic spending from your assets
is relatively easy typically you just need to sell something that you have if you have it invested
convert it to cash and then take the cash out that's often something you can automate
or you can have somebody handle for you but if you use mutual funds for example
it's really logistically quite easy to do a lot of people will take assets from a workplace
retirement plan like a 401k 403 b and move that into an IRA that you control and there are
generally no tax consequences as long as you make the transfer properly and don't necessarily take
possession of the money from there you have a lot more distribution options you can typically just
link your bank account and maybe you can go online or call somebody up and have the funds zapped over
to your bank account within just a couple of days and that can recreate or you can automate
and you can recreate what feels like a monthly paycheck you always have to be mindful of taxes so
definitely speak with a CPA or a professional as you set all of that up and start making decisions
because you don't want to get any tax penalties or pay any unnecessary taxes so you're going to want
to be mindful of this throughout retirement all that said it's not necessarily the best move in
every case to move money out of an employer plan it might be best just to leave assets where they
are at least for a while or maybe indefinitely and that's especially true if you have really
low costs in your employer plan and if you have a lot of options in terms of managing the logistics
and getting money out quickly and easily whenever you need it for more details on that
check out this other video that should hopefully pop up and covers the topic in much more detail
so let's get into some tips that can hopefully help you manage your spending and maximize your
spending so that you can enjoy retirement as much as possible the first thing to think about is
again you want to be tax aware and that might mean paying taxes even though you don't need to so as
you start spending from your assets you're going to choose where you pull the money from it might
be a Roth account might be a pre-tax IRA it might be a taxable brokerage account or a bank account
so the choices you make are going to affect what taxes you pay later and this can be a big deal
especially much later in retirement so you want to be looking ahead as you make these decisions it's
not just this year's tax bill it is the next 10 or 20 years worth of costs that you're going to pay
so for example by paying some taxes intentionally at a reasonable rate that you're comfortable with
you might be able to reduce the required minimum distributions or RMDs that you have to take later
in life typically after age 72 and that can be helpful because again you don't get a big chunk
when you don't want it and also when you're taking money out and it adds to your taxable income
that could cause more or most of your social security to be taxable and it can also affect how
much you're going to pay for health care so your medicare premiums might depend on what your income
is so you want to look at all of these different moving parts as you decide what to do and where
to pull money from and maybe doing things like Roth conversions even cash reserves often make
retirees more comfortable and that can be helpful in times when the markets go down and you don't
want to take withdrawals from things that are at a big loss because that can take a big bite out of
your total assets and it can derail a retirement plan so if you choose to have some cash reserves
whether it's a couple of years worth or some other amount that can be something you hold in
a bank account or other very safe cash equivalent type investments or vehicles and that way you can
still spend with confidence without having to worry about am i ruining my retirement income
now things can still go badly or they can go badly for longer than you expect or want but having a
cash buffer in some cases can certainly improve your chances it's also helpful to maximize your
income because that's what supports a lot of your spending so part of the spending that you do each
year in retirement comes from withdrawals from those assets but the base of your spending or the
base of your total income might be social security and pensions or other types of income so whatever
you can do to improve those that's going to help you and make it easier to keep spending on the
things you want so social security for example is a really helpful tool for spending in retirement
that's because it's a government guaranteed and inflation adjusted source of income so if
you can maximize your social security benefits without messing up other parts of your finances
that can be helpful so it might make sense not to claim as early as possible unless you have
reasons for doing so because you get that nice inflation-adjusted payment later that can help you
keep up with your spending and it's also helpful to run some numbers as you approach retirement
preferably several years or more beforehand it can be surprisingly enlightening to run those
numbers and just play with some calculators that way you might identify some opportunities or some
potential problems but the best way to do that is just to play with the numbers see how things might
unfold look at some different cash flows how they might come out what taxes are you going to pay
what if things go well what if things go not so well and by doing that you can learn a lot about
what things might look like for you. So I hope you found this helpful. If you did. please support the
effort by sharing this with somebody or leaving a quick thumbs up. Thank you, and take care