Plus or Minus

We’ve determined that our goal is to save enough to withdraw at least 4% of retirement savings per year in retirement, while maintaining approximately the same standard of living.  Although average returns in retirement are often estimated at a conservative 7% rather than 4%, this includes an estimated 3% inflation per year.  In determining whether the same dollar amount per year in retirement is reasonable for my situation, it makes sense to consider other factors that may affect income or expenses:

Taxes: I fully expect my taxes will be higher by the time I retire, whether income is 70% or 150% of what it is now.  The government seems to have no shortage of ideas on how to spend my money, and I expect this problem will likely define our government for the next 30 years, much as we are starting to see in Europe. One can dodge some of this by paying taxes now using a Roth IRA or Roth 401(k) – more on this later.

Expenses: My two biggest expenses are currently my home mortgage, and saving for retirement.  These will both be gone once I retire, along with other significant expenses, such as my student loan.  Related costs such as property tax, insurance, utilities, and the like will not go away.  Some expenses like transportation and food are likely to remain similar to current levels as well, but may vary with the cost of resources.  Other expenses are likely to rise in retirement, such as money spent on travel, hobbies, and medical care.

Other Income: I already have enough work history to qualify for social security on retirement, and if I work until my mid 50s, I should receive noteworthy social security income at 67 (or whenever I elect to take social security).  I do not expect to work in retirement with the goal of generating income, but some hobbies on the horizon may produce modest income, reducing the burden on my retirement savings.

Lake home, boat: I’ve always thought this sounded like a nice way to retire, and if it’s economically feasible I’ll likely try to find a place on water to live in retirement.  I may downsize, but expect that with transaction costs, property taxes, etc., such a move will not be inexpensive.

Conclusion?  My expenses in retirement will not likely be significantly below what they are today (adjusted for inflation), and are likely to be similar if not somewhat higher.  I’m therefore saving to replace my entire income, and trying to save more to give me some additional freedom to live near water.   So, using the hypothetical current income of $100,000, my goal is to have an income of greater than $100,000 per year in retirement.