Your Own Retirement Goal

All rules of thumb are wrong.

For instance, you sometimes read that a reasonable retirement goal is to spend 85% of what you are spending during your working years. At least I think that’s the rule of thumb. Or maybe it’s that your retirement income should be 85% of what your income was during your working years. These are two different things.

Whatever. It really doesn’t matter what the rule of thumb is, because it doesn’t apply to you anyway. In a comment to April 27’s post, for example, David suggests that his expenses will actually increase during his retirement years. In his case, he expects to incur higher travel costs. If he follows a rule of thumb in setting a retirement saving goal, he may have to actually use his thumb for travel.

So it pays to set a retirement savings goal based on your own spending needs. And what are they? Well, you can start with what you’re spending today and think through appropriate adjustments. How do you know what you’re currently spending? You could look at that directly by combing through your checkbook for the last few years, but that might be pretty tedious. Perhaps it’s easier to get at that indirectly by looking at your income and subtracting out your savings.

Then you can think through all your categories of spending, and project whether they will change—up or down. Here are a few items that may change:
• Retirement savings. That’s one “expense” that goes away. No more 401(k) deferrals; no more IRA contributions.
• FICA taxes. These stop when you’re no longer working.
• Your mortgage. When will this be paid off? Perhaps it's a disappearing expense. Unless you’re one of those refinancing addicts who take out a home equity loan before each visit to the gas station.
• Health insurance. Maybe this will go up, if your employer is now subsidizing this cost but won’t after retirement. Or maybe it will go down if you expect to rely on Medicare.
• Food. Maybe you’re cooking for four now, but that will drop to two after the kids are grown. Or maybe you’ll then eat out more. Or maybe dining out will cost less as you come to enjoy those early bird specials.
• Commuting expense. Goes down. Way down.
• Clothing. The cost of business suits goes down. But then again, Bermuda shorts, floral shirts and white shoes can be expensive, too.
• Travel. It’s a conundrum. Just when you have the time for more travel, your financial resources get constrained. But you’re able to take advantage of last-minute deals on cruises to Mexico and such.
• Grandchildren. That’s a whole new category.

What did I miss?