How much money will we need each year in retirement? That is the question we’ve struggled with the longest. It is also a huge determinant of when you’ll be able to retire. I can’t even say we’re done tweaking the number, but I can say we’re close and $80k feels about right. 80k is a big number with lots of play room in it. But I still worry it’s not enough.
My biggest concern by far is heath care. What would happen if one of us were diagnosed with a major illness in retirement? Would it be covered by whatever insurance we were able to get? Would we be dropped? Could we go back to work to get better insurance or would it be considered a preexisting condition and not covered anyway? This has been somewhat mitigated by the Affordable Health Care Act. This doesn’t do much to stop the continuing rise in heath care costs, but what it does do is ensure that preexisting conditions will be covered and that insurance will be available.
In order to estimate this amount, I went to Heathcare.gov and looked at different plans. The key points I looked at were the monthly premiums and the family out of pocket max. You might be amazed how large this number could be. I’m going to use $20k as my estimate. I think in most years this will be high, but again I worry and therefore want a cushion. This is not discretionary spending, so we need to have enough.
How much will taxes be? How likely is the tax code to change and how would that impact this amount? The two areas to worry about, in my mind, are the rates for dividends and long term capital gains. Based on the $2.5M savings goal and the average S&P 500 dividend yield around 2%, I’m assuming that $40k-$50k of my retirement income will come from dividends. Obviously, this is impacted by asset mix and other factors but it’s a good guesstimate. That leaves the remainder coming primarily from the sale of mutual funds or ETFs and the resulting long term capital gains. Based on current tax law, I don’t see any federal income tax impact. State income tax is more nuanced. We’re not even sure where we’ll live. Based on a review of several states in the running, I think a $5,000 budget will more than cover this impact.
My calculations for housing assume the house is paid for. We have a nice little chunk of equity in our current house and are assuming to downsize in retirement. So here are my housing related costs I am budgeting for. Real estate and school taxes: $5,000, Annual Maintenance: $2,000, Utilities: $600 a month for $7,200 annually. All in that comes to… well lets round it to $15,000, need room for google fiber.
We intend to drop to 1 car in retirement. That will be a fun experiment but I think we’ll be fine as long as we’re walking distance to a town center of some kind. That should put us easily under $4,000 per year. We drive cars for 10+ years already, that will continue. Should be an easy safe number.
Clothing, Kid stuff, and other Needs
Going to lump this into an amorphous blob of other needs. Kids cost money, socks need replacing, you need stuff sometimes. Individually immaterial but in aggregate need budgeting. Lets go $5,000 for this.
Now we really dig into some fun discretionary spending. In the last 12 months, we’ve spent the unfathomable sum of $31,283.51 between groceries, dining out, and drinks. We’re not out getting $100 bottles of wine, but its amazing how it adds up. We need to make some big cuts here to stand a chance at retiring. I am saying we should be able to stick to $400 per week for about $21,000 per year. We are working now to align our current spending closer to this budget. We’ll track progress over time.
Travel and Entertainment and the Rest
Traveling the world in first class style. Not on this budget, but we do intend to do some nice traveling and have to budget accordingly. Current plan is to alternate between big trip years and smaller trip years. Big trips will include visits to Europe and South America. A smaller trip could be a cruise or other child friendly relaxing activities. This also needs to include enough money for frequent visits to friends and family. Tack on tickets to movies and sporting events and understand this category is our cushion to cut into during the bad years and we’re going to put this one at $10,000 per year.
Health Care $20,000
Other Needs $5,000
Share your biggest budget concerns or debate my assumptions in the comments below.
I use Quicken for budgeting, big fan!