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Read any article on retirement planning and there will be something about the expenses that go away upon retirement.
Usually the top two are no more mortgage payment or saving for retirement followed by commuting and other work related costs, less driving hence less gasoline, less spent on clothes. Some articles mention no longer paying life insurance premiums, less dining out and fewer subscriptions.
Some of these may be significant and others not so much. Certainly if a mortgage is paid off at retirement that is a big reduction and no doubt most will see a drop in their savings rate especially if saving was a significant percentage of income.
On the negative side we are told we may see health care spending increases, more travel spending, higher utility bills because you are home more, home maintenance because you can’t do as much yourself and support for children and grandchildren.
My personal experience was no significant overall change in spending upon retirement because our mortgage was finished years before, our health insurance premiums increased significantly, I had no commuting costs, we wore casual clothes at work the last few years. Our travel costs increased. My payroll saving rate in the 401k was modest and is nearly the same now as a percentage of income while spending on family increased significantly. We eat out more.
So, overall what has been your experience or what does your spreadsheet predict will happen? 😉
Noticeable decrease in spending/expenses, about the same or increased spending – including discretionary spending?
As a single guy, I had lots of income and assets while working, but I was too busy at work to spend it. So I saved more than many people do.
But when I retired, I had even more assets and income, and inherited some money. But I also had more time to develop hobbies and interests that take a substantial amount of money. And of course, prices are now much higher for basic living expenses. So I spend considerably more than I did while working, and could spend even more if I wanted to.
I expect my expenses to remain fairly stable, I might relocate to a state that won’t tax IRA withdrawals as that could reduce expenses in an appreciable way.
Changing from savings to spending is likely the biggest impact, savings is a high percent of our monthly income.
We retired just over 2 years ago, so I’m beginning to see how accurate my guess on our spending would be. Although some expenditures went up or down, the overall is pretty close to what we used spend while working. Go figure, current behavior is the best predictor of future behavior. This works for us since we had planned for such case.
Sounds good to me.
My spending has increased significantly. I expected and planned for the increase. I now take 3 international trips each year. I do more socializing that involves expenditures. These increases were planned. My household expenses have not changed. I have not needed to take any funds from my IRAs or taxable account, RMD start next year. I am no longer accumulating financial assets, that is very different from my career years. After being a life-long saver, I adjusted to not saving money. Enough is enough. My financial future does not need additional resources. I am enjoying retirement.
I’m pretty clear on how this is going to look for me. I’ll have more take-home income because I was paying my (involuntary) share of my pension contribution and my (voluntary) contributions to my 403B and 457 accounts, plus my Social Security and Medicare contributions. We’re paying more for health insurance because of IRMAA, despite a supplement from our retirement system (CalPERS).
We live two miles from campus, so my commuting costs were negligible, and I didn’t go to campus everyday, anyway. We eat at home mostly except for a regular Saturday lunch on the patio of our favorite Mexican place. I’ve never been much for spending on clothes, etc., and I expect to spend even less as a retiree.
We do have travel plans, but except for the pause on that during COVID, we’ve been traveling quite a bit over the past ten years—my schedule as a professor has breaks, and my husband works remotely, and we agreed not to postpone travel until after retirement.
So at this point I don’t anticipate many surprises. I pretty much did that work last year when deciding on a retirement date.
Since retiring three years ago, my core expenses — which do not include taxes or charity — have increased 36%. This is due to insurance premiums not previously required (health, dental, IRMAA), increases in existing insurance premiums, and general inflation (food, utilities, etc.). Taxes are about the same as I have income from tax deferred sources and had worked half-time anyway for a few years before retirement. Major travel, renovations, and acquisitions hold little interest to me, and the costs of my hobbies are modest, so discretionary spending has also remained similar. Overall, I am not surprised by the new costs as I was quite thorough in my projections and retirement planning.
Just for fun I went to Quicken to see what I spent in 2002, my first full year of retirement and compared that to 2000 my last full year of work. 2001 was a mixed year so no good data. Anyway, in 2000 we had been really saving big time so when I looked at expenses there wasn’t really much difference once you took out the work related and income tax differences. In 2000 we had saved about 50% of our net, so in 2002 when we had no salary, we weren’t saving anything but our reduced income, then mainly investment income, still covered our expenses.
We have a few years to go, but running the numbers in Maxifi software tells me our discretionary spending amount could be a number that sounds ridiculous to me, in a good way.
Some expenses will drop, for sure. We may just sell our house and slow travel for a few years, renting a house/apartment in different places and just enjoying the tourist life. We have European passports, so we have options.
My understanding about the Maxifi spending amount (but I must admit I am a little confused by some of their concepts) is that is the amount you can spend annually and die with zero at 100. So you have to be comfortable with their framework.
We’ll be retired 10 years this month (wow, that’s hard to believe!) Besides an initial outlay of around 100K to renovate our lake house to a full time home, our other expenses stayed about the same. No new fancy car or clothes in the last decade. Great, fun vacations and international travel but nothing extravagant because frankly, we don’t enjoy extravagant. An exclusive 5 star hotel with butlers and a “pillow concierge” is my idea of hell. I’ll be going on medicare in a couple of months but the cost of the supplemental insurance will be close to what we are playing extra to be on my wife’s insurance. Maybe a bit more but nothing major.
The market has done well for us in the past 10 years, so I will admit that very recently we are learning to relax our lifelong frugal ways. Even as we feel like we are spending like crazy, it’s still only around 3%. I guess we need to start eating out more!
I wrote an article almost exactly two years ago about how my first 20 years of retirement worked out. Bottom line: pretty well. Some years I spent more than came in, some years I spent less, especially after I took my own Social Security and stopped traveling. Now I’ve moved to a CCRC, my expenses are more than my pension and SS, and I am drawing on my portfolio – or more exactly, at this point, on my cash reserves. My spending will increase with inflation, including medical inflation. Since I turn 78 next month, I figure I have a maximum 22 years to worry about. Dividing my portfolio balance by 22, subtracting 24% for taxes and dividing by 12 results in a number larger than either my pension or my SS. Would you worry?
Unlikely your effective tax rate is 24%, have you figured on your effective rate?
My marginal rate is 24%, according to my tax accountant. Since withdrawals from my portfolio would be on top of my pension and SS, the marginal rate seems more relevant.
I understand, all I was tying to say is that that while the tax rate on the next income you add may be 24% when you look at your total income and taxes paid you will find your real (effective) tax rate to be lower. The effective tax rate for the top 1% is only 26% on average.
See my reply to stelea99 below. The effective tax rate is not relevant to this calculation, which is about how much I can safely withdraw from my portfolio.
Not sure when you refer to your portfolio what kind of account do you mean? Will your withdrawal come from taxable, tax deferred (IRA ec), or tax exempt?
I have all three of these, but if I was taking $$ from my taxable account, about 42% might be capital gains available at a lower tax rate….or return of principal without tax…
Since I have to take RMDs, I am already withdrawing more than I need from my IRAs. I used 24% as a tax rate when doing the above calculation as that is worst case. If the actual rate on part of the RMD is lower, then more money is available.
Perhaps I should add that I’ve been taking RMDs for several years, and so far I have simply moved the money from my IRAs to my taxable account, minus withholding.
I have been taking RMDs for years, the amount is determined by law. I determine the withholding rate. I take more in withholding only to cover the taxes on things like dividends where there is no withholding and I usually get a tax refund.
is that why you use 24%?
By using 24% withholding on an RMD you may be missing an opportunity to reinvest more of it you don’t need.
Isn’t the calculation you want about how much you get to keep after taxes and will that be enough for 22 years?
I’m just saying you very likely can count on more than 76% of your withdrawals as net income from withdrawals.
The calculation is an exercise, it is not a reflection of what I actually do. I have my accountant calculate the withholding when I take the RMD in late October. However, when I figure how much I might safely take from my portfolio if I actually need the money, I prefer to err on the side of caution. And simplicity. Next you’ll be telling me I need a spreadsheet, 😊
Heaven forbid. I still don’t get it, but let’s leave it. Whatever works for you works.
Now that we are settled into the new house, our spending is about the same as our working years. Our net income has increased due to no longer contributing to retirement/savings accounts. We pinched our finances in order to pay for the new place, but in the 17 months since we moved in, we have adequately rebuilt the disaster bucket.
I agree that things will be going up from here, but have high confidence that today’s excess income will carry us through. There is one caveat; long term care. Insurance isn’t an option, and our IRA balance is not sufficient to self-insure a lengthy stay.
Of course there is no right or wrong answer, but was anyone surprised at what happened?
No.
Yes, I was surprised. I thought we would be going places. I also was a little surprised that our SS was more than I thought it would be a few years ago when I started planning. I was also surprised that it didn’t matter whether the small pensions were taken as a lump sum or monthly. Idk if it would have been different if they were larger? Chris
“I also was a little surprised that our SS was more than I thought it would be a few years ago when I started planning.”
Was the amount you were expecting obtained from the Social Security Administration? The number they provide you does not account for compounded increases due to inflation. Years ago I was surprised when we saw what the fee only CFP modeling projected for SS income as I knew what the SS Admin projected for us. The difference was the CFP amount projected income with inflation adjustments over a 10 year period until our expected claiming our benefits.
My wife and I were married later in life, only 4 years before we retired. So while we have a joint account we each contribute to, we keep our personal finances separate. We retired about 7 years ago (ages 65 & 60) and our household (joint) spending experience has been pretty much as we anticipated except for the covid period when our travel budget simply accumulated. In our personal lives, we’ve both experienced unexpected financial expenses helping family. But the way we’ve structured our finances lets us insulate those expenses from our joint budget (both fiscally and emotionally). That financial arrangement has worked well for us and allowed us to minimize the fiscal and emotional impact our personal family financial expenses have put upon our joint lifestyle. Overall our (joint) retirement expenses have been very much as expected, while our family financial expenses have exceeded our preretirement expectations. Gene
This is a great response and mirrors our situation, too. There have been four items that I can see have changed in the five years since we retired: home insurance, home property tax, groceries, and medical copays.
The change in medical copays applies to my personal expense account. While there’s been nothing serious, and most are elective decisions, I’m definitely going to this or that doctor way more frequently than I used to.
Our copays haven’t changed except Rx, property taxes up but not too bad, HOA up from $700 to $950 in seven years. Health insurance including Medicare up significantly.
We have been retired 18 mos. So far our expenses are similar to before retirement, but we had been living on much less than what we made. I had hoped we would be able to do some fun traveling, but so far the travel part of our income has been eaten up with going back and forth to visit family. We have been there much more than we had before retirement. Between Spouse’s brother’s decline and death from ALS and mother in law with a recent Alzheimer’s diagnosis, retirement hasn’t been very much fun so far. I know many of you have been through this too. We are glad we have been able to be there, though. Chris
I know what you mean. In my case, family impacts/situations have been much more impactful to my overall retirement situation than typical household financial items, from both an emotional and financial perspective. Best wishes going forward. Gene
Thanks for the encouragement, Gene. C
I sincerely hope things get better and your retirement is fulfilling in the years ahead.
Thank you, Dick. C
Our expenses have gone up some (10-20%), as a result of increased discretionary spending in the 7 years we have been retired, primarily on travel although we also bought a new car and put a small addition on the house. When we retired, our expenses were projected to triple over a 35-year retirement (yes with a spreadsheet). Current situation 7 years later: they are expected to more than double in 28 years (although income will do about the same).
Rob, is the doubling in 28 years from inflation? That’s only about 2.57% per year. The tripling in 35 years is about 3.28 %. Neither of these are especially big numbers.
I’m glad I didn’t see a projection like that, I might never have retired. When you saw that 35% what did you think about keeping up with a growing income?
Actually anticipate my spending going up a bit due to more travel and some capital project spend that is already (mentally) ringfenced.
But as my spending has been way less than gross income due to diversion into various investment wrappers and I’ll be a lot more tax efficient on drawdown, it shouldn’t be a problem. There’s plenty of slack in my notional “budget”, to the extent it’s more of a spend upper bound than a constraint and the value of the first couple of years will be testing how much I feel I want to use before settling on longer term drawdown strategies.
I’ll also probably denote a notional “one off” bucket on a when it’s gone it’s gone basis so that e.g. if friends suggest a trip to Japan I’m not the one sucking teeth and questioning whether I can afford it.
Whether we agree or not on something, you sure have a way with words.
That way is round quite a few houses.
❓
https://www.collinsdictionary.com/dictionary/english/round-the-houses
Just like our President
That’s being charitable 😉
I anticipate my expenses will remain stable. Even with a couple of foreign holidays annually, my personal drawings were consistently well below my business’s profits, meaning I already lived comfortably within my means. So my retirement budget is the amount I spent annually not the amount I actually made.
We retired 7 years ago, two years before Covid. We increased our spending on travel, golf, and dining out but our change in lifestyle and overall spending has not been that great.