November 18, 2021
By Markham Hawkins, Vice President, Goldman Sachs Personal Financial Management
This is a question that I get all the time in my meetings with clients who are close to retirement, and people often want a straightforward answer. But from my 11 years as a financial planner, there’s not a cut-and-dry number.
That’s because every client’s situation is different, and depending on their financial circumstances, their spending will change throughout the course of a financial plan – sometimes dramatically.
Think about it: If you plan on retiring at the age of 65 and you run a financial plan out to age 95, that’s 30 years to plan for.
Now, try going back to yourself at 30 years old and ask yourself what your finances will look like when you’re 60. Your answer would probably be way off base.
Trying to predict your future spending is an extremely difficult thing to do. We could make assumptions on things like inflation and market performance, but there’s more to it.
In this article, I’ll go over a few approaches that I like to take to help my clients figure out their retirement spending question. Hopefully, my insights will help you make the most out of your next visit with your own financial planner.
The first step I’d like to take to answering the retirement spending question is figuring out how much you’re spending now.
For this, you could use the expense questionnaire method. An expense questionnaire is a spreadsheet with a line item for every possible expense you can think of. This method might work for some people, but I prefer using the pay-stub method, which I believe can be a more straightforward approach.
Your pay stub can tell you a lot about how much you’re currently spending (and how much you might spend in the future).
When I look at a client’s paycheck, their take-home pay gives me a fairly good idea of what is left for them to spend after retirement contributions, benefits and taxes. In other words, I can get a general sense of their budget. (This is assuming you don’t have a substantial after-tax savings account elsewhere.)
To get a general idea of what your retirement could cost, I believe it helps to break down your potential retirement expenses into two categories: fixed living costs and spending goals in retirement. Let’s look at these in turn.
The first category includes your fixed living expenses. These are likely not to change much over your lifetime (but the costs may need to be adjusted for inflation). Living expenses may include things like food, gas and utilities – in short, the essentials that you’ll have to pay for throughout your retirement.
Now, figuring out your second category of expenses – your spending goals in retirement – can be challenging. Every retiree has different goals based on their own personal experiences, and for me, helping clients nail down their retirement goals is one of the most rewarding parts of being a financial planner.
At Goldman Sachs Personal Financial Management, we use an exercise called Honest Conversations® to help clients open up about their relationship with money and how they make financial decisions.
This exercise also gives financial planners an understanding of their clients’ motivations and priorities. Through Honest Conversations® with clients, I’ve heard various types of goals: Retirees want to upsize, downsize, move closer to family, travel, reduce taxes, plan for long-term care – you name it.
For many people, I believe that what they want to accomplish in retirement is achievable.
A key to success is knowing how to manage tradeoffs. And as a financial planner, I can help clients clearly define their goals, research the costs of those goals and come up with a plan to reach them.
Let’s revisit our original question: How much can I spend in retirement? The answer will depend on your personal situation since every retiree is different.
The two general steps I’ve outlined – figuring out your current spending and your spending in retirement – are a good starting point to help you get after your answer.
I know people want to see a magic number, but the truth is until your financial planner can take a comprehensive look at your financial picture (sources of income, expenses, retirement goals, etc.), a simple answer doesn’t exist.
For instance, knowing how much you can spend in retirement also means knowing things like when you should start collecting your Social Security income and how much risk you’re willing to take to meet your goals.
Sure, you may have the option of going with the conventional 4% spending rate on your assets. But the 4% rule doesn’t work for everyone because again, we all have different goals in retirement. The good news is financial planners like me have the retirement planning tools and decades of professional experience to help guide you to your answer.
If you take anything from this article, I hope you’ll take a closer look at your pay stub, print out your investment statements and then sit down with your spouse to discuss what you both want your retirement to look like.
If you’re prepared to have that honest conversation and willing to spend an hour with your financial planner, I believe you’ll be in a good position to figuring out your retirement number and what goals you can accomplish.
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