How much will you need to accumulate before you retire? After you retire you’ll likely spend as much as you spend during your working years. Although some expenses will shrink, chances are that you will still like to dress well, drive a nice car, play golf, and pursue other costly pastimes.
Assume, for example, that your family income is $100,000 per year during your working career. After taxes and investments (including retirement plan contributions), you might spend $60,000 per year. That’s a reasonable target for retirement spending. What’s more, that number needs to be increased for inflation. You might use a 3% inflation rate (the current annual rate) or be a bit more conservative and 3.5% or 4% as an inflation projection.
That is, if you want to spend $60,000 after retiring at age 62 you would have to spend about $62,000 at age 63, $65,000 at age 64, etc., to maintain the same living standard. With a 3%-4% assumed rate of inflation, spending doubles in 20-25 years. Will someone who spends $60,000 at age 62 really have to spend $120,000 at age 85?
Judging by the evidence, that’s realistic. Many people who are in their 80s who are just as active now as they were 15 or 20 years ago, so they keep on spending as prices have gone up. Those who retired 10 years ago have seen their expenses increase steadily and that likely will continue to be the case.
