In order to safely plan for a successful retirement, it’s imperative to have a general idea of what your spending needs will be when retired. We cannot calculate whether or not our anticipated withdrawal rate would be considered safe (in the range of 3% to 4%) without knowing the size of the annual withdrawal.
That number can be difficult to pin down, as there are many variables. It can be informative to budget (we don’t) or track spending (we do), but this year’s spending might not look like last year’s, and could be entirely different than what we will end up spending in retirement.
Fortunately, there are a number of categories in which your annual expenses can be expected to drop when you give up the day (and sometimes night) job.
1. The cost of commuting
Commuting costs many of us not only time, but money, and perhaps more money than we realize. I tend to think of the cost of driving in terms of the price of gasoline, but that ignores so many periodic expenses, including but not limited to oil changes, new tires, brake work, and repairs stemming from collisions with reckless deer.
The IRS reimbursement of about 55 cents per mile is probably a better reflection of the financial costs of commuting. A typical commute of 20 to 30 miles a day costs $11 to $16 a day or $55 to $80 a week. In a year, you could easily be spending $2,000 to $4,000 a year commuting, and that assumes you live within 15 miles of your job and only drive back and forth to your job five times a week. I often commute back and forth more than five times in one weekend.
In our household, we have limited our commuting expenses in a number of ways, including:
- Living very close to my workplaces
- Bicycle commuting
- Working (and therefore commuting) less
- Being a one-income household
If you’ve made some of these same decisions, or use public transportation, carpool, or walk to work, you may not gain as much in this category upon retirement. On the other hand, if you live 30 to 50 miles from your workplace, as some people in “bedroom communities” actually do, retirement could save you up to $10,000 a year in car commuting costs alone.
2. The cost of retirement savings
This may be quite obvious, and I don’t count retirement savings as “spending,” but if you believe in the benefits of the Live on Half challenge, you will be directing as much money to your retirement and brokerage accounts as you spend on everything else combined.
When the New Year arrives, I’ll begin frontloading my various retirement accounts, including the HSA, 401(k), and 457(b). Although that money is still mine, I certainly notice the difference when the much smaller direct deposits hit my savings account.
Once your retirement is fully funded, and you stop working for a living, you no longer have that perceived outflow. You may be taking from your accounts rather than adding to them, but if you’ve played your cards right, you should be in good shape to do so.
3. Taxes in retirement
Our current biggest annual “expense” is our retirement savings. Taxes represent our number two.
Taking advantage of geographic arbitrage while working in a high-income specialty but living in a high-tax state, we’ve found ourselves in the mostly fortunate position to pay six-figure tax bills throughout much of my career.
Once we are fully retired and no longer earning an income, I expect to be done paying federal income taxes. If we were to rent a home in a no-income-tax state, we could also avoid property and state income taxes. We probably won’t do that; it’s worth paying a few thousand dollars to lay down roots where we want them to grow, but if taxation were a driving factor, we could engineer a life in which sales tax would be the most significant form of taxation we endure.
Proposed tax reform appears to maintain the 0% capital gains bracket, which means it will likely continue to be the case that one can live well on tax-free dividends and capital gains from a taxable account. Roth contributions are available for withdrawal at any age, tax and penalty free.
If the bulk of your retirement savings is in tax-deferred accounts such as traditional IRA and 401(k), you may not have the option to live a tax-free retirement. There is a real benefit to some tax diversification among your retirement assets, a topic I previously covered in “My Money is Worth More Than Your Money.”
4. Mortgage payments
This isn’t directly related to retirement. You can still work and be mortgage free like me or be retired with a monthly mortgage payment for many years. However, there is something to be said for the freeing feeling of being completely debt free, and I do recommend making a strong attempt to eliminate your mortgage prior to cutting off your sole income source.
The math can certainly work out in the favor of keeping a mortgage and investing the difference, but once the mortgage is gone, you’ll notice an enormous difference in your living expenses. At one point in the past, we held mortgages on two different properties at the same time, and we put as much money towards retiring those mortgage payments as we spent on all other living expenses combined.
Now that we are free of both student loan debt and mortgage debt, we live a great life on about $5,000 a month.
When planning your anticipated retirement expenses, knowing that you are (or eventually will be) mortgage-free makes your monthly cash outflow much lower.
5. The cost of raising children
Like the mortgage, this is a cost that some people will never bear, some will be wrapping up, and some will have indefinitely. But I do know for a fact that children do get older with each passing year, and with any luck, will one day become more or less self-sufficient when it comes to money matters.
The Department of Agriculture estimates each child will cost you nearly a quarter million dollars to raise to the age of 18. And if you’ve heard of this thing called college, you know that the payments don’t necessarily stop when the high school graduation caps fly.
Eventually, though, you will find yourself spending less and less on your kids. They will one day pay for their own meals, buy their own clothes, and either spring for their own beer or sneak yours in a way in which you’ll never notice. They might even pay for their own auto insurance or cell phone plan, but I wouldn’t count on it.
The bottom line, though, is that the bottom line will change. You can’t (or you shouldn’t) provide for your offspring forever. Supporting a household of one or two will cost a lot less than you might spend on a household of four or five… or seven.
Honorable mention: The cost of professional clothing
I had this one on my original outline, but it didn’t make the final cut. My annual budget for professional clothing is less than ten dollars, or the cost of a few V-neck tee shirts I wear underneath my hospital-issued scrubs.
If, on the other hand, you have to dress up for your job or to look respectable at conferences, you may realize some significant savings here. Like my colleagues in the ED, I have no need for a tailored suit, but those guys and gals in the in-flight magazine’s Top Doctors pages sure do dress sharp.
“Physician on FIRE” is an anesthesiologist and can be reached at his self-titled site, Physician On FIRE.
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