The question I am asked most by clients is, “Do I have enough money to last the rest of my life?” I tell them I need the answers to two questions in order to answer them:

• What day will you die? (So I can determine how long their resources need to last.)
• How much do you spend each year?

Now I do not expect them to answer the first question definitively, but I am always surprised they cannot answer the second question!

Most people have no idea how much they spend. Their denial is amazing and jeopardizes the quality of their life during the most vulnerable period of life — when their income and health decline.

What is most surprising about a person’s lack of understanding of their living expenses is that the data is readily available. Moreover, software programs, such as Quicken, are inexpensive and easy to use. And for the folks who are not inclined to use a computer to track their expenses, their monthly bank statements are all they really need to add up the amount they spend each year.

 And What Do You Spend?

Figuring out how much you spend should be simple, if you are willing to do it. Spending falls into three main categories:

1) The “Fixed” spending you cannot control. These non-discretionary expenses include essentials such as housing, food, clothing, utilities, insurance premiums, health care and necessary travel.

2) “Time-discretionary” expenses, such as buying a new car or taking a vacation, can be deferred. But you can plan for them. For instance, many retirees like to buy or lease a new car on a regular basis, say every five years.

3) “Luxuries” you have absolute control over. These include life’s extras such as the round-the-world cruise, the African safari, the luxury model new car or extravagant gifts to family and friends. Leaving an inheritance to others is a luxury from the perspective of funding your retirement. If you make it a priority, you need to add it to your “nest egg.”

Why people refuse to be honest with themselves about their spending is best left to a psychologist. For those serious about understanding what they need to retire in comfort, there are a few simple calculations to make. I recommend you look at your annual expenses (rather than monthly) because everyone has a seasonality to their lifestyle (birthdays, holidays, summer vs winter expenses, occur at irregular times throughout the year):

A) What fixed income will you RECEIVE in retirement? $ ______________

• Social Security?
• Pension?
• Annuities?

B) What are your “Fixed” Expenses? (You cannot control timing.) $ ______________ 

• Mortgage or Rent.
• Auto expenses including insurance.
• Medical expenses including insurance.

C) What are your “Time-Discretionary” Expenses? $ ______________

• Lease or purchase of a new car.
• If you buy a car every five years, then include 1/5 of that cost for your annual expense.

D) What are your “Luxury” Expenses? $ ______________

• Gifts to children or grandchildren.
• Extravagant vacations.
• Second home.

If you find your expenses in B, C and D exceed your income of A, then you are ready to calculate the “nest-egg” savings you will need to generate for retirement.

Multiply any shortfall you calculate by the age “factor” you want to retire.

• At age 60 multiply by a factor of 30
• At age 70 multiply by a factor of 25
• At age 80 multiply by a factor of 20
• At age 90 multiply by a factor of 10

Self-discipline is Key

If you are wondering when to start planning for your retirement, the answer is that you probably should have started. The sooner you start saving for this elusive “nest egg” the better. Practicing self-discipline with spending in pursuit of financial health is much the same as the practice of self-discipline to maintain your physical health. You have to say “no” to yourself regularly. Indulgences will compromise your financial as well as your physical health.

Why Spending Matters

Understanding your lifestyle expenses provides a far more useful guide to what you will need in retirement than some arbitrary percentage of your pre-retirement income. Until people become honest with themselves, and look at what they actually spend, they cannot calculate how much they will need in retirement. Consequently, most Americans are underfunded because they refuse to understand what they spend.

That’s why asking about your spending is the right question to prepare you for a financially secure retirement.

(This article has been reviewed on June, 2024 since it originally published on April 2017.)