How To Build a Baseline for Your Retirement Spending

Steps to Build a Baseline for Retirement Spending

  1. Start with Current Spending
    • Use your existing spending patterns as the foundation for retirement planning.
    • Categorize current expenses such as housing costs, transportation, food, and miscellaneous expenses.
  2. Identify and Adjust for Retirement Phases
    • Early Retirement: Spending may increase (e.g., travel, dining out).
    • Late Retirement: Spending may decrease (e.g., reduced travel and personal expenses).
  3. Account for Inflation
    • Use today’s dollars for estimates, but ensure your plan adjusts for inflation over time.
  4. Create Financial Snapshots
    • Use tools or platforms to copy your current spending into different snapshots for various retirement phases.
    • Adjust individual expense categories for expected lifestyle changes (e.g., paying off a mortgage or downsizing).
  5. Address Missing or Miscellaneous Expenses
    • Review any gaps or unaccounted-for spending flagged by your planning tool.
    • Allocate these amounts into appropriate categories or adjust your miscellaneous budget.
  6. Simplified Estimates (Optional)
    • If detailed expense tracking is unavailable, start with a rough monthly spending estimate (e.g., $7,000/month).
    • Refine the estimate over time by breaking it down into specific categories.
  7. Understand the Impact of Small Discrepancies
    • Small differences in annual spending estimates (e.g., $4,400/year) can significantly impact your required retirement savings (e.g., $100,000+ in assets).
  8. Iterate and Refine
    • Return periodically to update and validate your estimates to align with lifestyle changes and financial realities.

This approach ensures you have a comprehensive, flexible plan for retirement spending, tailored to your lifestyle and financial goals.