Real Retirement Living Expenses

Most financial advisers say we will need to plan to spend approximately seventy-five percent of our pre-retirement income to maintain our current lifestyle in retirement. Some even say that we will spend the same in retirement that we spend before retirement.

I personally have a problem with this advice. I have researched this subject to determine current real living expenses and what our real living expense will be after retirement.

To completely understand real living expenses, we need solid, accurate data as a basis from which to start.

The best data source in the United States for this information is from the Consumer Expenditure Survey which is conducted annually by the Bureau of Labor Statistics of the Department of Labor. The information  for 2008 can be accessed at the website listed below.

The data that most closely models a couple nearing retirement is found in the table, “Composition of Consumer Unit”. In this table the column “Husband and wife only” contains the information that we need to examine.

From the survey, we find that there are just under 27 million couples in this “husband and wife only” group. The average age of the reference member is 57.6 years. The combined income of the couple is $75,312 and the after tax income is $72,457. Right here, the income tax savings is up to $2,855 depending on how much tax this couple must pay after retirement.

We find from the data that the total living expense of our couple is $58,164 or 77.23 percent of income. This is very close to the figure that the financial advisors are using. But wait! There are expenses in the $58K number that will disappear after retirement.

Also, the real retirement expenses can be broken into basic living expenses which are required for survival and discretionary living expenses which are “nice to have” but not totally necessary. Mind you, the definition of which are which will vary by couple.

I examined the living expenses and eliminated those that will disappear at retirement. I then classified the expenses as basic and discretionary. The result:

  • Real retirement living expenses – $41,834 (55.58% of income)
  • Basic living expenses – $30,144 (40.3% of income)
  • Discretionary living expenses – $11,690 (15.52 of income)

This is a considerable difference from the 75 percent “rule of thumb” used in the industry.

I encourage you to study the information from the survey of this average couple nearing retirement to see how your expenditures compare and what your real retirement expenses will be.

You may not need as much money for a comfortable retirement as your financial advisor is telling you.

Note:  Read the 2008  Consumer Expenditure Survey at BLS Consumer Expenditure Survey.