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When Planning For Retirement, Focus On Spending First

Northwestern Mutual

When it comes to creating a comfortable retirement, saving and investing during your working years are only part of the equation.  To make sure you have enough money to cover your lifestyle in retirement, you also have to take into account your anticipated spending.

To understand why, meet Karen and Susan, two hypothetical 50-year-old twins.

Similar, But Not the Same

Karen and Susan are identical in several significant ways. Along with their respective spouses, they each have the same combined yearly income. They are both good savers: Each has consistently contributed the maximum annual amount permitted to her employer’s retirement savings plans, and both have managed to set aside additional funds for the future. Fifteen years from now, when Karen and Susan both plan to retire, each should have $1.5 million saved in her respective qualified and non-qualified accounts.

As with most twins, however, Karen and Susan’s lives are not exactly the same.

Married nearly 25 years and without children, Karen and her husband, Eric, own their home outright. Susan and her husband, Tony, also have been married 25 years; however, they have four children ranging in age from 14 to 22. In addition to paying down their mortgage, Susan and Tony still face college costs for three of their kids.

So which couple is better prepared financially for retirement?

Rules of Thumb Aren’t Etched in Stone

A successful retirement doesn’t rest solely on the amount you save; it’s also dependent on the percentage of that amount you spend annually after you retire. Your lifestyle needs and wants, and the amount of money you’ll need to fund them, profoundly impact how long your money is likely to last.

Many experts suggest that you will need between 70 percent and 80 percent of your pre-retirement income each year after you stop working in order to afford a comfortable lifestyle in retirement.1 If that’s the case, Karen and Eric appear to have an advantage. Without a mortgage or children to support, their everyday fixed costs are lower than Susan and Tony’s.

But while rules of thumb can provide a good starting point for estimating retirement savings needs, they can take you only so far. That’s because each of us has different needs and wants that impact how much money we can safely spend in retirement.

Let’s dig deeper into Karen and Susan’s lives to see how.

Spending Habits Revealed

Karen and Eric lead full and active lives. They’re travel buffs who love to explore foreign cultures around the globe. When they’re home, they dine out three to four times a week, often at higher-end restaurants. They also indulge in their love of theater and sporting events with season tickets to the ballet, symphony and professional sports teams. Their hope is that retirement will provide the opportunity for even more travel and entertainment. Depending upon their specific plans, Karen and Eric may find that their expenses in retirement are greater than the 70 to 85 percent rule suggests. If that becomes the case, they may find they need to reassess their priorities to help ensure they continue to have sufficient savings to last throughout retirement.

What about Susan and Tony?

Susan and Tony also love to travel, but they prefer camping with their children to staying at a five-star hotel. They dine out, but usually once a week and typically at a local casual dining bar and grill. Like Karen and Eric, Susan and Tony enjoy cultural and sporting events. However, their front-row seats are most often at their local repertory theater and at the ball field of their local high school.

Because of this, Susan and Tony’s spending on discretionary items like travel and entertainment is significantly lower than Karen and Eric’s. And 15 years from now, when they plan to retire, Susan and Tony will have paid off their mortgage and finished with college expenses. This means their fixed costs may also be lower. If they continue their current spending rate in retirement, Susan and Tony may find that they have greater financial flexibility in retirement than they do now, giving them more options for how they may choose to enjoy their time and resources.

The Importance of a Retirement Spending Plan

Bottom line: In order to build a nest egg to cover retirement expenses, you need to take into account not only your savings but also your spending. If you don’t already know how much the lifestyle you want in retirement will cost, it may make sense to consult with a professional about your specific goals.

A financial advisor can help you create a sustainable spending plan for retirement by guiding you through the process of identifying the specific needs and wants that matter most to you, helping to ensure you have the money you need for retirement, for as long as you need it.

1 Reed Karaim. “Interest.com Study: Retirement Income Lags in Most States,” interest.com. June 10, 2013.

The Northwestern MutualVoice Team is a group of professionals who share insights and opinions from experts and industry leaders across the enterprise. Our vision is to inspire others to take action and plan for their financial future through topics ranging from financial planning, retirement planning and distribution strategies, wealth accumulation and preservation, to leadership, philanthropy and innovation.