Not long ago I was looking over my expenses when I had a financial epiphany of sorts. It was about the true retirement costs of my spending habits.
I recently wrote a post about how I’m going broke from eating out. In that post I tried to quantify just how expensive my +$6,000 per year dining out habit really is, and this is what I came up with: not only do I spend over $6,000 per year eating out, but maintaining that habit in retirement means that I need to boost retirement accounts by $150,000.
How to Calculate Retirement Costs for Anything
I don’t know how long you would need to work just to save $150,000, but saving that kind of dough would take me multiple years. I don’t enjoy eating out so much that I’m willing to add a few additional YEARS to my working career just so that I can keep spending $6,000 per year in mediocre restaurants.
That is the dark side of the Personal Finance Multiplier Effect in action.
Running the Numbers
Figuring out how $6,000 per year requires $150,000 in investments savings is pretty simple. There are two easy ways to calculate the true cost of something:
- Annual expense divided by .04
- In my case I spend about six grand per year eating out, so that would be $6,000 / .04 = $150,0000. Or,
- Annual expense multiplied by 25
- Again, using my restaurant bill as the example, $6,000 x 25 = $150,000.
Using the Rule of 25 and the 4% Rule, this cheat sheet will help you figure out exactly how much money you’ll need to have saved and invested for your retirement:
It’s Mathemagical
Some of you might recognize that I’m using math from the 4% rule to come up with these numbers.
For those of you not familiar, the 4% rule is a way of estimating how much money you’ll need to save and invest for retirement so that you can maintain your lifestyle without running out of money. To calculate that number, simply take your total annual expenses (housing, transportation, fast food, cable, cell phone, clothing, entertainment, etc.) and multiply that number by 25.
The number you get is how much you’ll need to save and invest. In a nutshell, here’s how it works: The stock market grows at an average rate of 7% per year while inflation grows at an average rate of 3% per year.
From that 7% investment growth you’ll be able to withdraw 4% to meet your annual expenses and leave 3% behind to keep up with inflation, meaning your nest egg should remain healthy throughout your retirement. Take a look at this example:
Retirement Cost Examples
Based on math from the 4% Rule, also known as the Safe Withdrawal Rate, you will need to have $100,000 invested to support any habit or hobby that costs you $4,000 per year (or $333 per month, or $11 per day).
Here are some typical expenses people have that will significantly increase the amount of money they’ll need need to have saved for retirement.
You can play with this retirement cost calculator to determine the true retirement cost of items in your budget.
How to Use The Retirement Cost Calculator
- Enter the amount of your expense (by default this is $100).
- Use the drop down menu to choose whether this a daily, weekly, monthly or yearly expense.
- Finally, use the slider at the bottom of the calculator to choose your safe withdraw rate. 4% is the default, but some plan on withdrawing more or less from their portfolio. Pick the SWR that works for you.
Save More or Spend Less
These are some pretty general examples, but you can see that if you’ve got a hobby or expense that costs you $300 per month, then you’ll need to have $90,000 in your retirement account just to support that one single hobby.
When it comes to saving for retirement, there are two levers that you you can pull:
- Earn more money
- Cut expenses
The less you need to get by, the less you need to save up to retire.
Think Differently
I can here the boo birds already: “I’m not going cut all of my expenses only to live a life of boredom and/or destitution!” My reply: Good for your – neither am I.
My goal for this post is to help you frame up future purchases a little bit differently so that you can be aware of the true costs of an item or service. Even small purchases can quickly add up, requiring you to add years to your working career just so you can support your lifestyle of choice.
Or, You can retire earlier than you think. You just need to start thinking differently.
Run The Numbers
Before making your next purchase, or signing for that next loan, or joining that next subscription service take 10 seconds to figure out how much this new item will cost you per year, multiply that number by 25, and ask yourself if you’re willing to save that much money just to support whatever it is you’re buying.
And on the flip side, take a look at your expenses. Don’t be like me and assume you know how much you’re spending. Begin to track every penny you spend, cut unnecessary expenses from your budget, and cut unnecessary working years from your life.
Every $350 per month that you can eliminate from your budget reduces your ‘magic retirement number’ by $100,000.
How long will it take you to save $100,000?
How long would it take you to cut $350 from your budget?
Chime in!
Were you already aware of the true cost of some of your hobbies and habits? Was this a surprise to you?
32 replies on “How to Calculate Retirement Costs for Anything”
That’s pretty eye opening. Although earning money is nice, sometimes you reach a point when it would take too much of your life energy that way, so cutting expenses is sometimes way easier. Always good to reassess and pair down where you can. Plus then you won’t be relying on certain things or services in retirement!
Thanks @budgetandthebeach:disqus. Cutting expenses is a great way to achieve some really quick wins – especially for those new to the FIRE world. I’ve done most of my expense cutting already, but I could go totally bare bones and get rid of another $1,000 per month from my budget if I really had to (or wanted to). That would reduce my “magic number” by $300,000, but it would also lead to a lifestyle that I wouldn’t enjoy. I want to enjoy my retirement, so I’m willing to work longer to save up the money I need (so that I can one day have a killer patio w/ outdoor lighting like someone that I know)
I really like this approach. It can definitely be rough at first adjusting to the new framework because every purchase seems huge and it is tempting to try to cut everything, but once you adjust it is a great way of putting things into perspective. It’s easy to brush off purchases that feel small at the time, but this gives you a good way of giving it greater context.
At first I think looking at this chart could be totally disheartening for some people. Others will be galvanized by it, will roll up their sleeves and get to work doing what needs to be done. In either event, I do think it provides context and that should help everyone out in the long run. Thanks for stopping by @optimizematt:disqus
This is a great way to evaluate spending. And I love the chart! 🙂 It’s a fine balance between enjoying life today and saving for tomorrow – this method is a great way to help you make the best decisions (which is different for everyone).
Thanks Amanda! You’re right – it’s totally different for everyone. Some will want to eliminate EVERYTHING from their budgets to retire ASAP, while others are more than happy to work longer to enjoy a more lux life in retirement. Thanks for stopping by – hope you’re doing well.
This was an eye-opener for me a few years ago and gave me the motivation to start cutting some of my frivolous expenses more aggressively. There’s a column that each of us can add to your chart that makes it even more compelling: years of work required to save this amount. If you’re earning $60k a year, for example, cutting that $200/mo of dining out just moved your retirement date a whole year earlier. It’s actually even more impactful than that, because you’re not actually banking $60k/year net of taxes and living expenses, and because reducing the $200/mo also just accelerated your savings. Small expenses have huge impacts over time.
Hey Matt (hi Daniel!) hope you guys are having a great time in Thailand! I’ll give you one guess what our Seattle weather is like today (hint: it’s been the same since October 😛 )
Yeah, my own budget spreadsheet has all of my finances, expenses, savings, taxes & debt intertwined so that I can see everything. When I eliminate an expense from my budget, or increase my income I can see my FIRE Clock drop. When I add an expense or lose income, my clock increases and a small part of my soul dies. 🙂
Ha! It’s over 100°F here right now, if that makes you feel any better. I love that your spreadsheet includes a FIRE clock!
Lovely. We’re waiting until July to come back!
Boo birds. Hahahahah.
My FI spreadsheet calculates by retirement numbers per category of expense. It certainly is easier to resist x * 12 * 25 than it is to resist x.
The other fun one that I like is “how many minutes of retirement will this $ buy me if i save it instead of spending it” I have a google sheets formula that calculates this. If you are interested you can find the formula in this old post of mine: http://www.bayalisistheanswer.com/fun-fire-numbers/
I love all of these different ways to quantify of spending and saving. I’ll be sure to check out your post with the ‘minutes saved’ formula.
I was just thinking about this the other day – love seeing this all put together. Its amazing how quickly it all adds up, isn’t it?
Thanks Chris. It’s interesting to see the amount needed to cover rent. For that type of dough you could buy a great house with $100k left over to cover taxes and some maintenance. In that case it seems that buying would be greater than renting. It’s got me rethinking my current strategy
Very nicely laid out, Ty! This statement is very persuasive: “Every $350 per month that you can eliminate from your budget reduces your ‘magic retirement number’ by $100,000”. A few restaurant dinners, an expensive cell phone plan, and an extensive cable package can cost you $100K.
Thanks, @mrs_groovy:disqus. It’s crazy to think how much money it takes to support relatively small expenditures.
Nice way to think about things. I think more in terms of how much this money I’m about to spend would grow in a taxable account. I could see how the $3,000 vacation I want to take could grow to $30,000 in retirement, etc.
I like your way of thinking too! Thinking of “small” expenses over a 10 year period helps provide additional context. Thanks for stopping by Wall Street Physician!
Love this look at it – I am so bad with math I wouldn’t have figured out that simple calculation to save my life! This will make it far easier for me to weigh certain things. I don’t splurge that easily but when I do it is usually travel related which makes it a larger expense. Going over my last few trips I would easily have spent the same money knowing what it actually cost me in retirement. Thanks, Ty!
Thanks @Miss Mazuma:disqus – I’ve got a column in my budget spreadsheet that shows me how much I’ll need to have invested to support that expense once I’ve FIREd. Makes it easy for me to identify expenses that I can eliminate. Like Cable/Internet – I need $48K to support that in retirement. Am I willing to work an extra couple of years just so that I can watch TV?
The major scary mystery question I wonder about is how I will actually fill all that extra free time in retirement. Can that be done inexpensively, or even for free?
I know how much my life cost when I was working, but when I’m not working – I have a huge increase in time to fill up. Will I fill the time with a hobby or hobbies that costs money or hobbies that make money?
Your infographic is awesome. I spend more on dining out in a normal month just for me! But I also spend very little on groceries…
It’s the great unknown for me as well! Thankfully I’m easily entertained, but still, filling up my days *could* get expensive if I’m not careful.
Love it! Some things seems totally worth it, like Netflix. That chunk of money for rent….ekkk. I’m glad our total housing cost is under $400 a month. I would totally set aside $15k for coffee. 🙂
Ty, awesome article. This really gets at the heart of one of the biggest ideas in personal finance – recurring expenses are far more costly than we think. I love the point you made towards the end – this isn’t a call to live a life of boredom and give up hobbies, but rather to be more mindful with our spending and recognize the true cost of expenses. Keep up the great content!
Thanks, Zach! I try to avoid giving out orders like “you need to cut cable if you want to get ahead!” That’s not my place. I just try to offer different points of view and share what’s worked or failed in my own journey.
I had forgotten about the 4% rule. I think the biggest surprise for me is home & car insurance. When we look at our spending in that category for a year, it’s the 2nd largest expense after our mortgage.
Auto expenses are 97% inefficient (b/c we only drive ~3% of the time). That’s a HUGE amount of money for something we use so little. Seems like such a waste to me. It’s one reason I ditched my second car ~18 months ago and have been riding the bus to work instead: http://www.getrichquickish.net/2016/11/ditched-car-saved-8000-one-year.html
This is awesome stuff, great infographic and such a simple but useful insight. Sharing widely! Thanks!
Thanks, Kurt! I see that you’ve already shared this on FB and Twitter. Much appreciated. Glad it was useful!
Saving enough money that will be okay to eat good food for the rest of life is just one part of retirement planning. Rather I should say there are many more areas that we need to explore to get a better understanding of things. Cost of living and health insurance terms and conditions are all important aspect that should be taken into account seriously. But things would get worse when we do not pay enough attention to the global economy because any fluctuations at the global level will directly effect the cost of living in every country.
Ty,
Thanks for this nice simple answer to a question I get all the time. I’m going to add this to my Fawcett’s Favorites on Monday.
Dr. Cory S. Fawcett
Prescription for Financial Success
Thank you, Dr. Fawcett!