There is a well know rule of spending that is often quoted when planning for retirement. They will say “you should plan to spend 70% of your pre retirement expenses in retirement”.

I am not a big fan of these rules. They work for some, but definitely not all. I wouldn’t even say this works for the majority.

The theory behind spending less is that you will no longer have the following outgoings:

• Retirement savings

• Work related costs such as carparks, travel and clothing.

My objection with this is that many people will actually spend more than they did pre-retirement.

Think about it. When we are working full time we are busy working, so don’t have much time to spend. The most spending we do tends to be on weekends when we have more time available.

When we retire, every day is like a weekend. We have all this free time available. I don’t know about you, but I will find it extremely difficult not to spend money with all this extra time. Leisure activities cost money.

If I followed the 70% rule then I would find my plan would fall well short of reality. This underestimation of how much I need in retirement can be costly, in not just the monetary sense of the word. Running out of money is a huge concern. If anything, our plans need to be conservative with in built safety margins.

Maybe the rule will work for you. But my advice is don’t plan something as important as your retirement by using something as crude as a blanket rule of thumb.

Other retirement rule of thumbs

Other rules of thumb include:

- “90% of your pre retirement income per year”

- “$1 million dollars (or some other flat amount)”

- “10 x pre retirement income”

At least the 70% rule of retirement focuses on expenses. These three don’t even consider your expenses. How can you plan your retirement based on what you earn? In retirement, it is your spending that matters, and we all spend at different rates. To plan using your pre retirement income numbers is absurd.

Even the ever popular “4% rule (or 25 x expenses)” has its limitations. This is the best rule of thumb that I could find, and I initially used it myself for my planning. But it is only a starting point. It is not the answer, and I have made many tweaks since then.

If you ever see advice that gives you a number without consideration of your situation you will be best to ignore it. They are designed to make you click on their article and nothing more. Fear sells better than math.

Consider your desired retirement lifestyle. What will a typical day look like? What are your 1, 2 5 and 10-year goals? How much will this cost on an annual basis?

Sure, it is difficult to predict future expenses. Heck, my budget is off target by $10,000 some years and that is only 1 year in advance. But doing it this way is much more accurate and will ensure you leave yourself every chance of not running out of money in retirement.

If you need help with your personal retirement planning, then get in touch today.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here