What‘s your Retirement Burn Rate?Submitted by Concierge Financial Planning, LLC on May 31st, 2016
“I really don’t know, Ann,” replied Steve after I asked him for his approximate monthly or annual expenses. Like many other clients, Steve and Jenn were wondering if they could afford to retire. They were mentally ready, but wanted to be sure they wouldn’t outlive their money while maintaining their quality of life. Steve had left the expense section of my questionnaire empty, which is surprisingly common. I can’t tell you how many people come to me asking if they can retire without knowing how much they spend, i.e., burn rate.
If you were wondering whether you could afford to purchase a house or a car you would certainly want and need to know what those items cost. Retirement is no different—it has a cost just like that new Honda you’ve been eyeing. I have to admit that when I’m grocery shopping I don’t always look at the prices of the items I purchase—but we’re talking about retirement, not premium ice cream. Your financial advisor can’t determine if you can afford to retire if they don’t know what that retirement is going to cost.
Jenn and Steve have approximately $2,000,000 in investment assets, not including their home. I’ve had other clients with similar savings—some could retire and others were not ready. It all depends on how much they want to spend. For example, Frank and Susie had $2,000,000 saved and were spending $52,000 per year after tax. Their retirement plan looked great. However, Sandy and Bill, who also had $2,000,000 saved, wanted to spend $150,000 per year after tax and, as a result, their plan didn’t look so hot.
On occasion I’ve seen clients purchase a car or send their child to a college they couldn’t afford. In these cases the clients saddled themselves with debt which is regrettable but not the end of the world. When it comes to retirement, however, there are no “Retiree Loans” like there are for students. With the exception of housing loans (e.g., a mortgage, line of credit, or reverse mortgage) there are no loans for retirement, so it’s important to know how much your retirement is going to cost before you make the big decision to end earned income. If you’ve made a mistake you may not be able to fix it down the road. For example, you may end up having health issues that prevent you from working or may end up compromising your quality of life.
The first step in determining what your retirement will cost is to figure out your current expenses. Yes, that tedious task of going through your online banking and annual credit card statements to come up with an accurate picture of your current life style budget. You can make it easier for yourself by using one of the many free online tools such as Mint.com, purchase software, or invest in an APP. I like to get an idea of what an average month looks like. For example, groceries for a year divided by twelve or vacations for a year divided by 12.
This way you can account for expenses, like vacation, that may not occur every month. Once you have your current expenses figured out, you can estimate the expenses you may no longer have in retirement. For example, your mortgage may be paid off or you may no longer have to pay commuting costs.
Figuring your current and expected future annual expenses is the single biggest favor you can do yourself when you start your retirement planning. Budgeting for retirement isn’t just for those with modest means either. I have a client couple with over $4,000,000 in investment assets and, after doing their plan, the analysis revealed that their $300,000 per year in after tax spending was not going to be sustainable.
I remember being at Bell’s grocery store in Buffalo with my mother when I was child. We saw a refined older woman with her cart filled to the brim with canned dog food. “Wow, that must be a big dog!” remarked my mother as we waited in the checkout line. “Honey,” the lady responded, “It makes a wonderful meat loaf and beef is so expensive!”
It’s better to understand your burn rate now before you retire—so you don’t end up eating dog food meatloaf in your 80’s.