Sure, You Can Retire

By: Jonathan D. Pond | Source: AARP.org | August 10, 2009

It may cost you a lot less to retire comfortably than you think.

Forget the often-quoted rules of thumb that suggest you'll need a retirement income that's close to (or some say in excess of) your pre-retirement income. Eighty percent is the commonly used amount, but I've seen as much as 110 percent. These are frightening amounts, but what else is new in the prevailing environment of scaring the daylights out of pre-retirees? Everyone's situation is different, but many retirees have found that they can live quite well on 65 percent or even less of their pre-retirement incomes.  

The following table gives you an idea of how your expenses are likely to decline after you retire, compared with what you're currently spending. These expense items include estimates of the percentage ranges of income that pre-retirees are currently spending on each. 

Pre-Retiree Expense Item	Typical Spending Level
Savings	5-20% of income
Work expenses	3-5% of income
Social Security taxes	6-8% of income
Expense reductions at retirement	14 to 33% of income
Reduced income taxes*	10%
Expense and income tax reductions at retirement	24 to 43%

* The average retiree pays about 10 percent less in income taxes compared with pre-retirement taxes, because of reduced income and favorable taxation of Social Security benefits.

Through the magic of subtraction, these expense and income-tax reductions suggest that a boomer could expect to retire on roughly—very roughly—between 57 and 76 percent of his or her pre-retirement budget.

While these expense reductions are typical of most retirees, there are additional expenses that you may be incurring now that could possibly be eliminated by the time you retire, which would further increase the above expense reductions, including:

• Mortgage                                            15 to 20%
• Children                                              10 to 20%

What’s Your Percentage?  
Use the following worksheet to make a rough assessment of how much it would cost if you retired today, but without the expenses that you don’t expect to incur when you retire. Here are some categories to consider:

Medical expenses – Unless you're lucky enough to work for a company that pays lifetime health benefits, it's likely your medical expenses will rise at least somewhat when you're retired. They may even increase to the tune of several thousand dollars a year. It depends on your own situation and a lot of uncertainty.  

Travel and leisure – The leisure afforded by the non-working life isn't free. Unless you're already taking lavish vacations and indulging in expensive hobbies, be sure to factor some fun money into your retirement expense budget.

Income taxes – Your income taxes will decline when you retire. For starters, you'll no longer have Social Security taxes taken out of your pay. This could reduce your expenses by almost 8 percent. On top of that, a lower retirement income will result in lower federal and state income taxes, and perhaps property taxes.  

Retirement-plan contributions – These will end when you retire, as will all or most of any money you put away in non-retirement accounts.

Job expenses – Depending on your job situation, such expenses as commuting, lunches, and job attire will no longer be required. If you're married or partnered, you might even be able to offload one car.

Mortgage – If you pay off your mortgage (or, perhaps, just pay off a home-equity loan) between now and the time you retire, this could be a whopping reduction.  

Tuitions and other child expenses – If you're currently saddled with tuition and kids at home, these not inconsiderable extractions will, one can hope, be substantially reduced when you retire. Prudence might dictate that all child-related expenses probably not disappear from your retirement budget, since children may always be somewhat needful of the parental purse.

Whatever your situation, you may be delighted to find that your ability to retire in comfort will require quite a bit less than you had been led to believe.

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