Paula Pant is an award winning writer and speaker who specializes in budgeting and personal finance. Ms. Pant has a new slant on retirement planning and spending that just may blow all the outdated retirement strategies out of the water. Rather than concentrate and prepare on your retirement income the personal finance experts have been stressing for decades, Ms Pant says there’s a new rule of thumb to consider: your retirement expenses.
Basing your retirement savings goal on your expected annual expenses — rather than your current annual salary — makes a lot of sense. I support this approach and believe that it trumps the traditional rule of thumb that over-focused on your income.
Rather than pick an arbitrary number based on the salary you’ve negotiated with your current boss, you should figure out how much money you want to live on each year during retirement. Then multiply by 25. That’s how much you’ll need to save.
Of course, there is one critical factor in making this approach work. You must be able to accurately estimate how much money you’ll need each year for your living expenses when you retire.
If you want to read more about Ms. Pant’s new retirement expense theory, click here. But to summarize what Ms. Pant is recommending, it’s rather very easy to figure it out.
Look at Your Current Spending
Look at your current annual spending, project what you plan on spending each year in retirement, do you still have child expenses (college, weddings etc), will you still have a mortgage or debt, will you travel, don’t forget property taxes, insurance, simple medical co-pays and deductibles.
Calculate Your Social Security and Pension Income
Total up what you will be receiving from Social Security, annuities, rental properties, royalties, guaranteed income and any pension.
Now Subtract and Multiply
Subtract all your income sources from your estimated annual expenses. The amount left over is how much you’ll need to withdraw from your portfolio. Multiply this number by 25. This is how big your portfolio needs to be.
Ms. Pant gives us an example:
Expected Retirement Expenses: $65,000 per year
Pension and Social Security Income: $30,000 per year
Net Rental Property Income: $5,000 per year
Formula: $65,000 – $30,000 – $5,000 = $30,000. This is the amount, per year, that must be withdrawn from this person’s retirement portfolio.
$30,000 x 25 = $750,000 retirement portfolio needed.
For us, DH and I anticipate being in dual full retirement in the year 2022. Based on our current expenses I project that our expenses should be in the $40,000 a year category. Our total income at that time, based on Social Security for the both of us, one glorious pension and one source of guaranteed income, we will be getting $37,082 per year. After I subtract our expenses from our income, that leaves a deficit of $2,918 per year. Times that deficit by 25 years and hubby and I need at least $72,950 in savings cash to tide us through till age 93 and 87 respectively.
This is NOT an impossible feat. In reality, based on Paula Pant’s newfound way of retirement thinking (and planning) DH and I have enough in savings cash to tide us over for the next 68.5 years till age 136.5 and 130.5 respectively. And this does NOT take into affect any equity we have from the sale of our marital domain! Nor have I calculated for inflation, long term care or medical calamities. So, if as the years progress and you find yourself cash short, cut your expenses. It’s a lot easier, to lower your expenses in retirement, than increase your income.
You can trust me on that fact!