Hello $wanigans! Welcome back to The Green Swan. Last week we went down memory lane when we discussed wallcharts. Wallcharts remind me of my not so great experience with the smile face or frowny face stickers I’d get for daily behavior in elementary school. However, last week we talked about the exciting side of wallcharts…financial wallcharts! Doesn’t that get you jazzed up?!
And now that I’ve taken you back to the elementary school years with wallcharts, now it is time to fast-forward to the retirement years! How about that for a journey on the magic school bus (or should I say on the Green Swan)?! Following on last week’s post, we are taking it a step further today by going into detail on my estimated retirement lifestyle and expenses. So let’s jump in!
Our Retirement Lifestyle
Dispelling “Expert” Advice
In previous posts, I’ve talked about my historical expenses. Last week I laid out my [expenses over the last eight years] and in early January I went through the specifics on my 2016 expenses. And that’s all good and dandy. Lucy and I continue to do what we can to minimize expenses while trying to balance enjoying life in the present. After all, we are frugal millionaires.
What matters the most though is what our expense structure will look like in retirement. If we have a good sense for how our lifestyle and expenses will change in retirement, then we’ll know how big of an investment portfolio we’ll ultimately need. If our expenses are going to continue to be around $60,000 per year, and I feel comfortable with a 3.0-3.5% safe withdrawal rate, then I need approximately $1,715,000 to $2,000,000 in my investments portfolio ($65,000 / 3.0 and 3.5%, respectively).
This truly is the best thought process for determining our Financial Independence (FI) magic number. The so called financial experts offer generic advice that retirees usually need to replace 70-80% of pre-retirement income in retirement. But what if you are like me with a decently high salary and relatively low expenses? It makes no difference what my income is, it matters what my expenses are! So do yourself a favor and disregard the so called “expert” advice. Generic expert advice is rarely helpful, I’ve already dispelled that myth on emergency funds.
Our Retirement Lifestyle
My retirement lifestyle is not easy to sum up in a simple fashion. Why? Because I’m not just retiring and spending my waning days on the beach or golf course. Although I could think of worse ways to spend my time!
Nope, not at all. I expect to be FI by age 35 and will likely formally retire from my day job a few years thereafter, let’s say by age 38. So if I drop the mic at age 38, my retirement could foreseeably be 50+ years long (if I could be so lucky!). Needless to say, my retirement will evolve over many phases.
Phase 1 (Soccer Parents):
This phase will last about 11 years and take us up to 49 years of age. The kids will be ages 7 and 10 at mic drop (retirement…), and this phase will represent our time in retirement when they are still living at home. This phase will be characterized by an emphasis on family time and parenting.
Phase 2 (Empty Nesters):
Freedom! The last kid will get the boot and we’ll begin the empty nester phase. This phase will be characterized by more freedom and flexibility to travel and more significant involvement in our hobbies. I’d expect this phase could last up to 20 years before we begin to slow down traveling, but it could come earlier or later.
Phase 3 (Gray Hair Club):
The Gray Hair phase is how I’m characterizing our last phase. We’ll be 70+. Hopefully we continue to have our health and wellness, but we’ll likely slow our traveling down. We’ll maybe be looking to find our last home, perhaps moving across the country to stay near to kids and grandkids.
Estimating Retirement Expenses
As you can imagine, retirement expenses will not be a flat $60,000 over our potential 50+ year retirement horizon. As we move and transition in and out of phases and our priorities change, our expenses will flux considerably.
There are general parameters that we can set up to estimate our expenses, but there will always be a fudge factor as much of our expenses will be discretionary. Isn’t that what retirement is all about! Doing those extra fun things, a vacation on a whim, and spoiling grand kids with a surprise large birthday gift!
Our intention will be to set up retirement with a good cushion to our expenses for things like this, which can also provide a double benefit as a discretionary expense category we could cut back or curtail if we need to. No doubt, there are many levers that we could pull to adjust our retirement expenses and income if necessary.
So what will our expenses look like from phase to phase? Let’s take a quick look:
Four Degrees of Conservatism:
- I’m trying to be conservative with my estimates for each category. For example, hobbies don’t have to be so expensive annually, but they could be. Vacation expense may not be $10,000 every year, but one year it may be $15,000 and the next it may be $5,000.
- While my estimates are conservative, I am also adding on a 10% “cushion” category to all Baseline expenses as an added degree of security.
- Discretionary items represent almost 30% of my estimated annual expenditures. This can be curtailed in years where we need to preserve cash (i.e. a substantial drop in the stock market).
- Lastly, I intend to head into retirement with a Smilodon at my side, representing a $3 million investment portfolio. This would kick off more income than necessary, providing extra cushion to the tune of approximately 40%-45% of my estimated expenses throughout retirement.
Major Trends / Notes:
- Kid related expenses in Phase 1 migrate into increased travel and leisurely spend in Phase 2 which migrates into increased healthcare related expenses in Phase 3.
- I imagine retirement life as life without a mortgage. I may ultimately decide to carry a mortgage, but I will then increase our required investment portfolio for the added debt. But for now I’m simply estimating my real estate tax and insurance expenses.
- Healthcare – Who knows what this will cost us! I’ve played around on the exchanges to see what it would cost if we didn’t have an employer subsidized health plan. It could be $10,000 or more even, but could quite possibly be less if there continue to be income-based subsidies (or age-based subsidies as currently contemplated in the proposed Republican healthcare plan). We don’t require much care besides preventative care so hopefully our health and wellness continues. There is a fudge factor here, of course, and I’ve modeled a substantial increase beginning in Phase 3 to reflect more deductible / out of pocket expense.
- What about inflation??? While I know expenses don’t ever stay stagnant, the SWR of 3.5% is based on the premise of preserving purchasing power. Said another way, historical analysis has shown an approximate 3.5% SWR will have a high probability of preserving not only the notional $3 million investment portfolio but also my baseline and discretionary expenses adjusted for inflation annually. Some helpful tools include cfiresim.com and firecalc.com.
While it is early, Lucy and I have found it helpful to start giving some thought to how we envision retirement including potential expenses. At this point, it feels like heading into retirement with Smilodon will be sufficient, maybe even over kill (bad pun…), but we’ll continue to adjust plans and expectations as the date nears.
What are your thoughts about retirement lifestyle? Any suggestions on how to plan for a 50+ year retirement horizon? Let me know in the comments below!
Thanks for taking a look!
The Green Swan
P.S. Do you need help in tracking your expenses and investment accounts? Check out Personal Capital today (see link below), it’s free…whatcha waiting for?!