How Much Can You Afford to Spend in Retirement?

Congratulations on your retirement! Although you don’t have to worry about punching a clock and reporting to a boss any more, you still have to make sure that you preserve as much of your wealth while offering yourself a healthy income.

Here are a few tips about how much you can afford to spend in retirement.

Use the 60%-90% Rule

Chances are pretty good that, when you used a retirement savings calculator a long time ago to calculate how much you’ll need for your golden years, you accounted for the cost of inflation. That’s good, because inflation is almost certainly going to be a part of your retirement years.

If you’ve factored in inflation, then a good rule of thumb is to live off of 60% to 90% of your after-tax income when you retire. That will give you some cushion in the event that inflation rises a little more than you expected, but should also provide you with a comfortable income during your retirement.

Keep in mind, though, that this is only a rule of thumb. If you’ve retired to an area with a high cost of living, you might need to spend much more than the 60% minimum and may even need to spend more than the 90% maximum. If you live an area with a very low cost of living, you might get away with living off of half of your after-tax income

Use the 4% Rule

The 4% Rule is one of the easiest rules to follow when it comes to determining how much you can withdraw from your retirement portfolio every year.

During your first year of retirement, withdraw 4% of the money that you’ve saved. That’s effectively your annual income. Then, during each successive year, use that amount as a baseline and adjust it for inflation and other rising expenses.

Keep in mind that this rule gives you about 30 years of income. When you decided to build your retirement portfolio, you plugged in a life expectancy age. If you think you’re going to live 30 years beyond retirement, then you’ll have to withdraw less every year or look at buying longevity insurance.

Some Expenses Will Increase

You might think that all of your expenses will decrease when you retire. However, that’s not always the case.

If you were accustomed to setting your thermostat to a non-room temperature number while you and your spouse were at work, for example, then your heating and air conditioning costs might go up now that you’re both home all day, everyday.

Also, you might do a lot more travelling. If you’ve got adult children and grandchildren that you’d like to see from time to time, and they don’t live near you, you’ll have to take some flights or road trips that cost money. Be sure to account for those types of expenses as you enter retirement.

You’ve worked hard to save for retirement. Now, it’s time to enjoy your sunset years and live a little. Just be sure that you preserve enough of your wealth to last throughout your entire life.