Your monthly expenses fall once you retire. Or at least they’re supposed to.
But what if they don’t?
Standard financial planning assumes that your expenses in retirement will be 70% to 80% of your expenses during your final working years.
But a recent study by MoneyComb and Duke University suggests that the real number can be a lot higher. As in 130%.
That number might sound ridiculously high at first, but think about it. You might have massive expenses in retirement that you didn’t have in your working years, such as paying for your adult children’s weddings.
Plus, without work taking up eight to ten hours of your day, you have a lot more time to sit around the house and impulsively buy things on Amazon.
But before we get into any of that, consider where the old 70% to 80% rule of thumb came from.
In a simpler time, you might have bought a house at 30 and lived in it long enough to pay off a 30-year mortgage. So, you entered retirement without one of your biggest expenses – the house payment.
Today’s retiring Boomers are far more likely to have moved multiple times for jobs and possibly divorced once or twice.
They’ve taken out new mortgages at each stop along the way, resetting the 30-year clock, and enter retirement with those debts left to pay.
Otherwise, where else are big drops in spending going to come from? Your electric bill doesn’t magically drop once your paycheck stops.
And you might spend a decent bit more on travel and leisure since you have the free time.
And let’s face it. Unlike their parents’ generation, which learned frugality during the Great Depression, the Boomers were never the most fiscally disciplined. Does that magically change in retirement?
I would take all retirement estimates with a large grain of salt.
In my opinion, Americans hit their peak spending years long before that, between 46 and 54 on average, depending on their income level.
Spending declines after that, but it does so gradually. And it doesn’t suddenly drop 20% to 30% at retirement (or soar by 30%).
As you do your retirement planning, I recommend you take an honest look at your finances.
Unless something is fundamentally changing, such as your mortgage getting paid off, your post-retirement expenses are going to look a lot like your pre-retirement expenses.
Try to set that money aside and out of your regular investment or spending account. Consider that money already spent and not part of your retirement nest egg.
The Social Security Administration estimates that your Social Security benefits will only replace about 40% of your paycheck. That means the remaining 60% has to come from your investments.
That could be $50,000, $100,000, or even a lot higher depending on your lifestyle.
At today’s current average savings account rate, you’d need a ridiculous $11 million to generate just $10,000.
If you needed an extra $50,000 to top off your Social Security income, you’d need a nest egg of $55 million.
The further you get down the scale, the numbers get a lot more reasonable.
You’d need $751,800 in the average five-year CD in order to generate $10,000 in retirement income, but “only” $325,733 or $304,878 in 10-year Treasury notes or a utilities index fund.
That’s still a lot of money. You’d need a million dollars in savings to generate just $30,000.
Bond yields are rising, but they’re still far too low to meet the retirement needs of most investors.
I look for income stocks that are a little off the beaten path. Some sport monster yields over 10%, while others sport more modest yields of around 4%.
But, in my opinion, all pay substantially more than what you’re going to get in traditional income investments.