A Discussion on Balancing Saving and Spending: Earning the Income Needed for Retirement


Some people may have preconceived ideas about how their spending will change when they retire. You may think that you will spend less and save money in some categories, only for the opposite to be true. However, it is not always easy to know.  

For a realistic picture of your financial situation, you should estimate how your annual spending and income will change after you retire. Depending on your retirement plan, your spending may change in a different way than another retiree. Everyone has different financial needs and expenses.

Will You Spend More or Save More During Retirement?

How will retiring affect your expenses? Although some aspects of retirement expenses may be difficult to predict, others may be easier to take into account. It’s a good idea to evaluate your non-discretionary and discretionary expenses to get an idea of where you might find savings, and where you might find some unexpected increases in spending.

Non-discretionary expenditures are required for daily life and generally can’t be avoided. You don’t have much control over them. These costs include:

  • Living expenses: Living expenses include groceries, gas and utilities. These have the potential to change significantly once you retire, but you should be able to estimate whether you are saving more or spending more depending on your lifestyle choices. Whether you plan to stay in your home or relocate affects these expenses. If you plan to stay in your pre-retirement home, you probably have a good idea of what these expenses will be. If you plan to downsize or upsize your home, you may save more or spend more on this expense during retirement.
  • Debt: Do you carry any credit card debt? What about a mortgage or car loan? You need to account for all your debts when you plan out your retirement expenses. Do you have a plan to pay down debts before retiring? If so, you may find savings in your budget if you no longer have debt payments.
  • Taxes: You may find savings in this category if you are no longer working. However, you may have to pay some income tax as well as capital gains taxes, so it is important to know how capital gains taxes will affect you.
  • Insurance/health care: Health care costs have historically risen faster than inflation,[i] and these costs tend to make up a large percentage of retirement expenses. And if you face any emergencies or long-term health issues, you may need to make sizable payments on short notice. This may be a category where you encounter more retirement spending than you anticipate.

Discretionary expenditures are nonessential costs, but may be an important part of enjoying your retirement. These costs include:

  • Travel: Many people look forward to travel in their retirement years. They envision making that dream trip, taking long and luxurious vacations, or visiting grandkids more often. Depending on how often you traveled in your pre-retirement life, you may see an increase in spending in this category after retirement.
  • Hobbies: If you have additional time to spend on hobbies, you may find that you end up spending more in this category during retirement.
  • Luxuries: Who doesn’t like to indulge in something luxurious once in a while? Retirement can be a great time to do that. Will you be dining out, going to the theater or enjoying fine wines? Whatever your idea of luxury is, you will need to consider the costs—and if you are indulging in luxuries more often during retirement, you may see an increase in spending.
  • Children or grandchildren: This category includes some of the expenses already mentioned. Will you be traveling more often to see family in retirement, or gifting money to your children or grandchildren? If family members are a focus during retirement, your budget must be appropriate.

Inflation and time horizon

Your spending and saving may also be affected by inflation and your investment time horizon. Inflation can reduce your purchasing power over time. Although inflation rates can vary year over year, inflation has averaged approximately 3% per year since 1925.[ii] It may not initially sound like much. But if that inflation rate continues and you need $50,000 now to cover annual living expenses, you’ll need about $90,000 in 20 years and about $120,000 in 30 years. It is important to be aware of how much your living expenses may increase in the future because of inflation.

Investment time horizon also plays a role in your total retirement costs. In addition to your own life expectancy, consider your partner’s life expectancy. Many people are living longer because of medical advances. To be on the safe side, prepare to live a long time and make sure you have planned to meet your financial needs.

What Are Your Preconceived Notions about Retirement Spending?

You may believe you will spend significantly less in retirement across many categories. It is worth keeping in mind that costs of spending categories fluctuate. Exhibit 1 shows price changes in various categories from December 1989 to December 2017. You can see that clothing costs fell in that period, whereas health care, energy prices and food costs rose.   

How will your spending and saving change in these categories? This will vary from retiree to retiree. Carefully evaluate how your choices in each category will affect what you may actually spend.

Exhibit 1: Price Changes in Vital Expense Goods Categories, December 1989 - December 2017

Source: FactSet, as of 01/09/2018. Consumer Price Index data from 12/31/1990 - 12/31/2017.

How Much Retirement Income Do You Need?

Now that you’ve thought about how you much you may spend in retirement, how will you provide that income? Begin by considering all your current sources of investment and non-investment retirement income. 

  • Do you have a 401(k), 403(b), IRA or other retirement accounts?
  • Do you have any taxable investment accounts?
  • Do you plan to take up a part-time job and earn a salary after you retire?
  • Are you eligible for a pension, and if so, how much can you expect to receive regularly?
  • If you have started taking Social Security, how much do you receive? If you haven’t, think about what age you want to start receiving Social Security benefits and how much you can expect.
  • Do you have financial interest in a business? Do you have rental properties that generate income?
  • Are your financial investments allocated appropriately for your needs?

Our Advisers Can Help   

Do you have a sufficient nest egg to enjoy a comfortable retirement? When evaluating your retirement planning, make sure to estimate your retirement spending carefully. If you need help assessing your cash flow, income and retirement expenses, contact us today or download one of our educational guides to learn more.

[i] Source: FactSet, as of 01/09/2018. Consumer Price Index data from 12/31/1990-12/31/2017.

[ii] Source: FactSet, as of 2/12/2018. Based on US BLS consumer Price Index from 12/31/1925 to 12/31/2017.