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Hi all,

I think the most difficult part in planning for retirement is estimating your future expenses. What will be the effect of inflation? What lifestyle changes might happen? Will expenses constantly rise or will there be some leveling off or even initial reductions? Will you totally lose some expenses, but pick up new ones? Also, someone who is 1 year away from retirement will likely have a better idea of their expenses than someone who is 20+ years away. Even predicting expenses 5 years out can be very difficult.

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. No matter how much you do in the first two, it’s unlikely you’ll be able to avoid doing the last, something most of us don’t want to do.

For my situation, pensions and social security would cover the lowest expense projection with the paid off mortgage. 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).

My IRA needs to fall somewhere between $0 and $600,000 for retirement at age 60, assuming we stay in the lower half of the expense range. For comparison, about 5 years ago, I thought we’d need $1 million, so we are at least $400,000 better off. I’m hoping the IRA needs to be somewhat lower than $600,000 because it would give us more breathing room. 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.

So, how difficult is it for you to project your retirement expenses? For those of you who are within 1-2 years of retirement, how confident are you with your projections? For those of you who’ve retired in the last few years, did you over-estimate or under-estimate your expenses?

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