Expenses now are 50k a year...can I plan that for retirement?

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doss
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Expenses now are 50k a year...can I plan that for retirement?

Post by doss » Fri May 25, 2018 7:03 am

Hello Bogleheads!

I'm using the Vanguard Retirement Income Calculator and trying to get an idea of how much income I'll need in retirement with a retirement age goal of 55-57.

Currently, we have a toddler but plan to have another in the coming years, so I expect our expenses to increase. Right now our expenses average about 50k/year (that includes mortgage). We feel very comfortable at this level (live in Midwest) and we are actually working on cutting our expenses even further....We also save about 44k a year (just started doing this 2 years ago) to retirement (currently have about 360k for retirement)

Using the above calculator with an income of 170k (single income earner), do I really only need about 30-40% (about 50-70k) of my current income in retirement if our expenses are only averaging 50k/yr? After kids are gone, and the mortgage paid off, the expenses will be even less? I thought I always heard that you want to plan for about 85% of your salary in retirement?

My wife is almost 10 years younger than me and I am planning to go on her medical insurance once I hit retirement. Not sure how much longer she will want to work before she retires...so we will need to fill that gap with medical insurance somehow (employer doesn't offer HSA). But, if we won't have a mortgage , would the insurance be about the same per month as the mortgage? In other words, 50k expenses (in today's dollars) will still be about right in retirement?

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badbreath
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by badbreath » Fri May 25, 2018 7:09 am

how old are you?
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

livesoft
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by livesoft » Fri May 25, 2018 7:10 am

First, it doesn't matter what you plan in detail since the details will change as time passes.

Second, yes, you can plan to spend only $50K a year in retirement.

Third, you can always change your plan.

Fourth, I cannot tell how much health insurance will be for you from this side of the internet. That is something you will have to find out for yourself. I retired and I am on my spouse's health plan from her employer.
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The Wizard
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by The Wizard » Fri May 25, 2018 7:19 am

Answer depends both on how many years remain until retirement and what you want to do in retirement.
More travel will cost more; I hear New Zealand is nice to visit.
And my new car purchase in 2015 cost around $50k and with inflation, will be more in the future.
Your mileage may vary...
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dbr
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by dbr » Fri May 25, 2018 7:36 am

doss wrote:
Fri May 25, 2018 7:03 am
Hello Bogleheads!

Using the above calculator with an income of 170k (single income earner), do I really only need about 30-40% (about 50-70k) of my current income in retirement if our expenses are only averaging 50k/yr? After kids are gone, and the mortgage paid off, the expenses will be even less? I thought I always heard that you want to plan for about 85% of your salary in retirement?
Ignore statements that one needs x% of income in retirement if you can see that does not apply to you.

On the other hand, in my opinion, one of the largest sources of possible error in running a retirement model is the estimates of how much one will want or need to spend. You have to think about that in detail, and that is hard to do from a great distance in time. Retirement is approached by successive approximations. I think one good idea is to allow significant contingency in spending, such as 25% extra, and also to stress the system by imagining what would happen if one had to come up with $100,000 or so for some unexpected event somewhere along the line.

PS I am glad I did my planning with a 25% contingency because for various reasons one would not have anticipated that contingency has materialized in several years.

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Watty
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by Watty » Fri May 25, 2018 7:39 am

doss wrote:
Fri May 25, 2018 7:03 am
I thought I always heard that you want to plan for about 85% of your salary in retirement?
Rules of thumb like that are pretty worthless since the details of what people spend are so variable. T

he median household income in the US is about $59,000 so with a paid off house $50K is certainly enough for an adequate lifestyle once you get on Medicare since you don't live in an expensive area. I am retired in a moderate cost of living area and I have a paid off house and my retirement budget is about $60K and that is enough for the core expenses for a middle class lifestyle here including some international travel.

You will also need to budget years which you have large sporeattic expensed like when you buy a replacement car or have an expensive home repair.

Your expenses will also be a lot different at different ages. When people retire they often do things like travel or get started in hobbies that can run up their expenses but as they get older and naturally slow down some of that spending may be reduced.

One thing I have found is that the way my income is structured means that my income taxes are much lower and I am no longer paying Social Security and Medicare payroll taxes.

doss wrote:
Fri May 25, 2018 7:03 am
But, if we won't have a mortgage , would the insurance be about the same per month as the mortgage?
There is no way to know what health insurance will cost next year much less a few decades from now. When you get close though you can fine turn you retirement date based on the situation then. For example if you could retire today except for health care costs then if you work one more year that could essentially add a years income towards healthcare costs.

doss
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by doss » Fri May 25, 2018 7:44 am

badbreath wrote:
Fri May 25, 2018 7:09 am
how old are you?
38

togb
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by togb » Fri May 25, 2018 7:58 am

agree with all that's been shared thus far and a few extra thoughts:

-what about college funds for those kids?
-I think you can open an HSA even if it's not offered by employer. It would be well worth checking on that
-Old people have high medical expenses. I'd want to add at least 20K annually as a contingency for same.
-Do consider what you will do with your time in retirement. Most options have a cost

In short, I'd have a cushion. You already live in a low cost area, so that's not a good contingency. Just think through the "what ifs" and plan accordingly.

dbr
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by dbr » Fri May 25, 2018 8:03 am

togb wrote:
Fri May 25, 2018 7:58 am
agree with all that's been shared thus far and a few extra thoughts:

-what about college funds for those kids?
-I think you can open an HSA even if it's not offered by employer. It would be well worth checking on that
-Old people have high medical expenses. I'd want to add at least 20K annually as a contingency for same.

For example getting whacked for $5k-10K for dental work can happen in any given year, not every year. The smaller the budget you plan on surviving with the more you have to think of contingencies. That dental work may not amount to as much for someone living on $150k a year. This is not to put down people with limited financial resources but rather to be realistic when you are far enough out to be thinking about it.


-Do consider what you will do with your time in retirement. Most options have a cost

In short, I'd have a cushion. You already live in a low cost area, so that's not a good contingency. Just think through the "what ifs" and plan accordingly.

carolinaman
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by carolinaman » Fri May 25, 2018 8:15 am

It is difficult to predict what your spending will be in retirement because you apparently are too far from retirement and are just now starting a family. Rules of thumb and what you are doing are good enough for now. As you get closer to retirement, especially once children are grown and off your payroll, is a better time to predict actual spending.

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ruralavalon
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by ruralavalon » Fri May 25, 2018 8:35 am

doss wrote:
Fri May 25, 2018 7:03 am
Hello Bogleheads!

I'm using the Vanguard Retirement Income Calculator and trying to get an idea of how much income I'll need in retirement with a retirement age goal of 55-57.

Currently, we have a toddler but plan to have another in the coming years, so I expect our expenses to increase. Right now our expenses average about 50k/year (that includes mortgage). We feel very comfortable at this level (live in Midwest) and we are actually working on cutting our expenses even further....We also save about 44k a year (just started doing this 2 years ago) to retirement (currently have about 360k for retirement)

Using the above calculator with an income of 170k (single income earner), do I really only need about 30-40% (about 50-70k) of my current income in retirement if our expenses are only averaging 50k/yr? After kids are gone, and the mortgage paid off, the expenses will be even less? I thought I always heard that you want to plan for about 85% of your salary in retirement?

My wife is almost 10 years younger than me and I am planning to go on her medical insurance once I hit retirement. Not sure how much longer she will want to work before she retires...so we will need to fill that gap with medical insurance somehow (employer doesn't offer HSA). But, if we won't have a mortgage , would the insurance be about the same per month as the mortgage? In other words, 50k expenses (in today's dollars) will still be about right in retirement?
Your 26% saving rate is very good. In my opinion you are doing very well so far.

Yes, retirement living expenses can be much less than 85% of pre-retirement employment income.


doss wrote:
Fri May 25, 2018 7:44 am
badbreath wrote:
Fri May 25, 2018 7:09 am
how old are you?
38
A lot can change in the next 20 years. So plan but be flexible. The most important thing you can do now is to continue a high savings rate, save as much as is practical for you.

The common idea of retirement expenses being 85% of income is often just plain wrong. Instead retirement expenses are some fraction of expenses soon before retirement. The problem is you are about 20 years from retirement, and your expenses just before retirement (and in retirement) will likely be much different than they are now.

Look at current living expenses in detail, and estimate retirement expenses by adjusting for what may change between now and then. Examples are mortgage expenses, taxes, college expenses for children, health care, home maintenance and repairs, and travel.

Health insurance on the private market is very expensive, often a big surprise for anyone who had insurance paid for by their employer. We paid $1,800 per month ($23k per year) before I retired in 2011. I don't know the cost on an exchange. The best you can do is shop for a policy with a local agent to see what the current cost would be for you in your locality.

Also even after age 65 there will be premiums for both of you for Medicare Part B, Part D drug coverage, and any Medicare Supplement policy. Check to see what the current premiums would be for you in your locality. Finally, in general Medicare does not cover dental, vision or hearing.

EDIT: In my opinion it's usually not practical to make a solid estimate of retirement living expenses 20 years ahead of time. I think an estimate 5-10 years before retirement can be reasonably accurate. My estimate 5 years before retirement turned out to be very good.
Last edited by ruralavalon on Fri May 25, 2018 8:58 am, edited 2 times in total.
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soccerrules
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by soccerrules » Fri May 25, 2018 8:47 am

a few comments
I recently read a stat that said for those retiring with more than $500K, had 88% of that amount 18 years later. I will leave that there.

My plan is to retire in 7ish years around age 60. My current expenses are roughly $110-120K a year. My projected spending 60-65 will be $85K or 75%, my bare bones spending during the same time is about 55K, or 50% of my current spending. The difference in bare bones and projected is Travel, more food spending,more charitable giving and misc.

I will have no mortgage and no college expenses in 6 years (lord willing)-- this is one key to my plan.

Kids are expensive and get more expensive as they age. From about age 12-13 to 22 -- whoa. YMMV
Don't let your outflow exceed your income or your upkeep will be your downfall.

22twain
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Re: Expenses now are 50k a year...can I plan that for retirement?

Post by 22twain » Fri May 25, 2018 8:51 am

doss wrote:
Fri May 25, 2018 7:03 am
Right now our expenses average about 50k/year (that includes mortgage).
Does it also include taxes?
an income of 170k (single income earner)
In retirement, how much tax you pay will depend on the nature of your income and how much of it is taxable. In our case, about half of our savings is in tax-deferred 403(b) accounts. We're both delaying Social Security until age 70. When we both reach that point and are also taking RMDs, our taxable income will be in the same ballpark as the maximum when we were still working, so our taxes will also be similar. At least for federal tax; our state doesn't tax SS and has a "retirement income exclusion" that will offset much of the RMDs.
My investing princiPLEs do not include absolutely preserving princiPAL.

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