On Monday, I estimated our annual retirement income to be around $200,000. Let’s hope all that comes to pass over the next 30+ years. (It never does, does it?)
Today, I’d like to look at the other side of the equation, what I’ll spend in retirement. This is something that very few people sit down and try to calculate. The most diligent financial people I know usually use a rule of thumb of 75% of what you are spending now.
Rules of thumb can be helpful when you have to make a quick estimate. I’ve got nearly 30 years before I reach age 65, so why not carve an hour out to do some of the most important calculations in my life. Also, neither me nor you are a rule of thumb.
My attempt here is not to say this is the right way to do it. I don’t think I’ve seen anyone else even attempt it, so it is uncharted territory as far as I can tell. I’d love any feedback you provide in the comments below.
I’m going to just throw my table at you. Then I’ll make like Lucy and do some ‘splainin’.
| Type | Sub Type | Retirement | |
|---|---|---|---|
| 2/16/2014 | |||
| Real Estate (Residence) | |||
| Primary Residence | Mortgage (PITI) | $400.00 | |
| Transportation | |||
| Subaru Forester | |||
| Car loan | $215.43 | ||
| Insurance | $98.01 | ||
| Gas + Maintanence | $50.00 | ||
| Acura MDX | |||
| Car loan | $376.60 | ||
| Insurance | $78.46 | ||
| Gas + Maintanence | $50.00 | ||
| Total Transportation | $868.50 | ||
| Day Care | |||
| Groceries | $400.00 | ||
| Utilities | |||
| Gas | $134.92 | ||
| Electric | |||
| Water | $27.49 | ||
| Cell Phones | $70.00 | ||
| Internet | $52.00 | ||
| Landlines | $3.00 | ||
| Total Utilities | $287.41 | ||
| Dog Care | $133.33 | ||
| Insurance | |||
| Life | $56.65 | ||
| Valuable | $8.99 | ||
| Total Insurance | $65.64 | ||
| Real Estate (Investments) | |||
| Condo 1 | Mortgage (PITI) | $450.00 | |
| Income | $1,500.00 | ||
| Profit | $1,050.00 | ||
| Condo 2 | Mortgage (PITI) | $400.00 | |
| Income | $1,250.00 | ||
| Profit | $850.00 | ||
| Condo 3 | Mortgage (PITI) | $400.00 | |
| Income | $1,250.00 | ||
| Profit | $850.00 | ||
| Total | Expenses | $1,250.00 | |
| Income | $4,000.00 | ||
| Profit | $2,750.00 | ||
| Total Personal Expenses | $2,154.88 | ||
| Profit from real estate after personal expenses | $595.13 | ||
| Entertainment | |||
| Cable Television | $86.71 |
There’s a lot going on up in the table.
- These expense numbers are monthly. That’s because our bills tend to be monthly ones. This is in contrast to the annual income.
The numbers are in today’s dollars. It’s just easier to understand it that way rather than projecting out 30 years of inflation. That projection could introduce errors if I choose an inaccurate rate of inflation.
- You might notice weird retirement items such as day care with no money besides it. I create this table by taking what I spend money on today and pairing it down. It seemed like the best place to start, because I already have that data.
- The obvious problem with taking today’s expenses and pairing them down is that it doesn’t factor in any new expenses. Just looking this over quickly, I realize that health care didn’t make my chart.
We are fortunate in that we’ll have the military’s TriCare for Life. That covers a lot of health care. When eligible for Medicare Part B we’ll have to pay those costs which is the $272/mo. (which is based on being in a high income bracket). This area in particular will probably have a billion and a half changes in the next 30 years. The only thing we can count on is that it will be a crap shoot. We can also guess that we might be better off than most because of the TriCare for Life program.
- You’ll notice a section at the bottom of real estate investments. This is a result of it being a both an expense and an income. It wouldn’t be fair to leave it off the expenses, because we do have to pay it. At the same time, it wouldn’t be fair to characterize a profitable asset in the same way as a car loan. Missing from this is the maintenance of the properties, but it does include our condo fees.
For fun at the end, I decided to subtract the profit from the rental properties from our expenses and was pleasantly surprised to learn that real estate investment alone will pay off most of our expenses.
- I’ve amortized the costs of some of the items such as car loans. The cars we have now are on 5-year (60-month) loans at 0% and 1.99%. I’ve taken the payment and divided it half to represent the 5 years we intend to drive the cars afterward with no car payment. We intend to drive cars longer than that, but 10 years is a good average for most people.
- You may notice that I have nothing for electricity. The big change this year is that we are going to solar power. The panels are rated at 25 years, so when we get to retirement age, we may have to spend on electricity again. The panels we are getting now, should still be 80% as efficient then. That might be enough, but if it is not, we should be able to supplement them with the latest 2045 solar technology.
- In the effort of saving some time, I used some of the numbers from last year. The cost of car insurance didn’t go up that much in a year. If it did, the cost of gas has gone down enough to balance it off.
- These are just necessary expenses. It doesn’t include entertainment, dining out, any kind of fun travel, or really anything else.
Will this be accurate some 30 years in the future? Of course not. However, it is a very good start. If I take the personal expenses and add in the health insurance that didn’t make the table, our annual expenses come to around $29,120. It’s always wise to throw some padding in, so let’s call it $40,000 a year.
With that projected nearly $200,000 in income, it looks like we’ll be able to budget a good deal of travel in. Maybe I can even convince the wife that we can splurge on a LG 65″ 4k OLED television or whatever is the equivalent in 2040.