How to Retire With The Same Spending Power as Today
“How do I retire with the same spending power I have today?”
Well, what do you spend now?
If you don’t know, a good proxy is as follows:
Total your income
Subtract your savings (which I would define as 401k, 403b, TSP, SEP, SIMPLE, IRA, additional principal payments on debts, or brokerage contributions)
You can do three things with money:
Either pay off debt, save money, or spend money so what’s left over is typically what’s being spent (if not allocated to your cash reserves).
If you want to get fancy you could consider the change in your year over year cash reserves.
Why?
Because if your cash balance in August 2022 was $70k and now in August of 2023 it’s $100k, then you can reasonably say that you saved $30k. Or, if your cash balance in August 2022 was $100k and now in August of 2023 it’s $70k, then you can reasonably say that you spent an extra 30k.
Let’s play this out:
Household income is $250k
Household savings is $50k
Cash balances have remained the same over the last year so our spending number is $200,000/yr.
This $200,000 is used for vacation, food, taxes, insurance, and debt payments.
Saving $50k also means that our savings rate is 20%.
Next question to work through is when do you want to retire and how much have you saved already?
Typically no one I talk to says they want to work until they’re 65 (although the retirees I talk to say they aren’t ready to retire - interesting dichotomy) so let’s meet in the middle and assume we retire at 55.
Let’s say we’re 35 today, so we have 20 years until we want to make work optional (or retire).
Additionally, let’s say that we’ve saved $200,000 to this point.
So with 20 years until we retire, $200k in savings, and $200k in annual spending, here’s some assumptions we have to make regarding future unknowns:
What rate of return can you reasonably expect to receive over the long haul?
6%
What will your social security payment be?
$2,700/mo
Will you have any pension income at retirement?
$0
Do you plan to grow your savings percentage through time?
Percentage stays the same but will grow with salary
What inflation rate will you use?
3%
What percentage of the portfolio can we safely assume to withdraw annually?
4%
If we inflation adjust your current level of spending today, you’ll spend $562,772/yr starting at age 55.
Minus your future inflation-adjusted social security benefit ($91,169/yr), this creates a $471,602 annual withdrawal need from your portfolio putting your ballpark portfolio figure needed to fund this spending need at $11,790,071.
If you continue to save 20% of your inflation adjusted salary over time, you’ll end up with ~$10,057,801.
You’re short by $1,732,270.
There’s three things you can do now to increase your retirement success:
Spend less
Save more
Work longer
If you consider each option, here’s what would happen:
Spending less would result in $68,749/yr ($5,729/mo) or 14.59% less spending.
Save more would mean increasing your savings rate to 24%/yr or 20% more savings per year.
Working longer would be 2.21 years (26.5 months).
You could do 1 of three or a mix of all three - the beauty of personal finance is that it’s personal to you.
This is pie in the sky, the question is now, how do you execute on making this happen, here’s where I would begin:
How to spend less (one of my personal favorites)
How to stick to your plan when things get tough (my other personal favorite)
To an enjoyable ride to making work optional.