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For example, I’m approximately 7 years away from retirement and I’ve estimated that my annual expenses in retirement can range anywhere from a low of $45,000 to a high of $114,000. The low end assumes we pay off the mortgages, while the high end assumes we move, upgrading housing with a bigger mortgage and a slightly more lavish lifestyle. Our current expenses fall somewhere in the middle of the range.

The difference between the low and high expense estimates is about $60,000 and would require about $1.5 million in additional asset equivalents over the low estimate. Accumulating this additional amount would mean a combination of increasing savings, taking on more risk to increase returns and extending out our retirement date.

The fact that you opened by saying that you're approximately 7 years from retirement, and you ended with extending your retirement date, tells me that you really don't know when you're going to retire, because you haven't yet made the decisions that need to be made in order to get a real handle on what your expenses will be.

The high expense projection would require additional savings, likely working until age 65 and increasing my average return rate to something above 15%. Fortunately, we can take steps to avoid the high projection and hopefully end up in the lower half of the range (i.e., skip that big retirement house in an expensive area).

Until you make the decision about whether or not you're going to buy this house, there's no way you can estimate expenses. Expecting an average return rate of 15% is, for all practical purposes, not doable. How long will it take to accumulate the additional savings required at an average return rate of 7%? In addition, you have to apply some inflation rate (I would suggest 3%) to your current expenses AND the additional expenses associated with the upgraded house (utilities, insurance, prop. taxes, etc.). Once you have these numbers you will better know what your expenses will be, and how much longer you will have to work to be able to afford that upgraded house. If you find that you'll have to work until you're 70 to do it, it might make your decision easy.

Worst case, we’ll see where we end up and plan on living within our means. We can do this since pensions and social security will cover the bare minimum expenses, assuming we can pay off the mortgages.

IMHO, this is not a good way to approach it. To simply say that we'll 'plan on living within our means' just doesn't work, and neither does 'assuming' you can pay off the mortgages.

One good exercise to see what you actually need would be to try for one year to live on the $45,000 that you say is your minimum. If you can't live on that now, how can you expect to live on that later?

I'm sorry if I sound harsh, but I'm trying to clarify some of these issues for you.

I plan to retire within 3-5 years.

I track all of my expenses using Quicken, and have been doing so for years. Each year I update my 'retirement expense' spreadsheet with the new numbers for basic living expenses (groceries, telephone, cable TV, internet access, utilities, gasoline, home insurance, liability insurance, auto repair and insurance, out-of-pocket medical expenses, etc.) I then add certain necessary costs, like long-term care insurance, additional health insurance costs, additional medical costs, and any other additional costs I expect I will have to pay. Then I add the costs of dining out, entertainment, travel, etc., all estimates based on my current spending. This gives me a basic 'annual nut' number, but doesn't include any large one-time expenditures like new cars, or home improvements, etc. I know I can live within these cost parameters, because I actually am living within them now.

I maintain a spreadsheet that includes my current portfolio, plus additional savings each year until I retire, with an average return of ~7% for the next 30 years. It includes the basic 'annual nut' number (less my SS benefit) with an inflation rate of 3% for the next 30 years. The spreadsheet calculates my taxable income each year, and the taxes due, and adds the taxes to my basic 'annual nut' number.

Assuming that market returns and inflation over the next few years match my estimates, my spreadsheet tells me I can retire in 5 years easily, while 3 years is pushing it quite a bit (won't get SS in the first 2 years).

Whenever I want to wake myself up to reality, I just add the cost of a nice new car in year 1 of retirement (in my case ~$45,000). A $45K withdrawal in year 1, coupled with the additional taxes that would be due on the same, makes quite a dent in the portfolio 30 years from now. :-(

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