How Much Income WIll You Need to Live On?

Basically, there is a two-part answer to this question. The first part is that you must have enough income to meet your non-discretionary expenses, i.e your needs. The second part of the answer is a bit more involved as it deals with how much you want so you can live a little!

Non-discretionary spending fulfills needs such as housing, medical and food. Discretionary spending fulfills wants such as dining out, entertainment and travel.

However, our and your individual cost for these needs and wants is affected by our (your) unique situation.

  1. The cost of living
  2. Having to pay a mortgage or rent
  3. Level of debt upon entering retirement
  4. Health-related needs
  5. The need or lack thereof to support others
  6. The need to replace a car sooner rather than later
  7. The urgency to perform home maintenance (like a new roof)
  8. How much money we can afford to budget for discretionary items

It was straightforward for us to come up with the first part of the answer, e.g. how much income do we need to cover our non-discretionary expenses. Using our budget, we simply added up the expenses that we need to pay (or else suffer undesirable consequences like having your water or power shut off).

The second part of the answer involves discretionary spending is more complex. Again, turning to our budget, we can fit or adjust how much we want to spend based on:

  1. Getting estimates for projects
  2. Ranking projects in terms of priority
  3. How much travelling we have committed to and how much more we want to do
  4. Comparing how much we have spent in the past for things like entertainment, dining out and personal services and expenses, with how much we want to spend in the current budget year.
  5. The rate of inflation

Our discretionary spending is constrained by the ability to generate income and how much we can liquidate which are dependent upon the state of financial markets. If market conditions are favorable, then there will be more income available to spend on discretionary items. And of course the reverse is true. We were fortunate to retire in an up market or bull market. The S&P 500, a.k.a. “the market”, was up nearly 15% in 2010, 3% in 2011, 16% in 2012 and 32% in 2013. Did we plan it that way? Of course…not! As I often say, it’s better to be lucky than good. However, I like to think that if the markets were clearly in “bear territory” (down 20% or more), that we would have considered delaying our retirement. Or, we would have re-examined our living expenses, especially our discretionary expenses, and cut back.

Let’s look at an example to make this more concrete. Let’s say that we are able to generate or allocate $50,000 to spend. Our non-discretionary budgeted expenses – taxes, utilities, food, insurance, auto expense and medical – total $35,000. That leaves $15,000 for discretionary expenses. We have two home improvement projects on the drawing board. The most pressing is estimated to cost $7,500. The other is estimated at $4,000. We have several trips that we want to take. The first priority is an overdue family visit. This trip involves flying, renting a car and a hotel. It’s cost estimate for 7 days is $2,500. We have two more trips that we would like to take. One is estimated to cost $1,800 and the other $3,000. Lastly, our first take at our entertainment budget comes out to $6,500. All totaled, our non-discretionary projects come out to $25,300 which is $10,300 over our $15,000 available discretionary budget. So in order to make the numbers work, we decide to include the number one home improvement project for $7,500, our family trip for $2,500 ($10,000 sub-total) and to reduce our entertainment budget from $6,500 to $5,000. This example shows how challenging it is to make the numbers work and the types of trade-offs that have to be made.

To wrap up, it’s been over 4 years since we retired. How have we done? In year 1, we budgeted and spent conservatively to allow ourselves time to adjust. Our spending in year 1 was 63% of pre-retirement spending.  In year 2, in part due to a backdrop of rising markets, and the inclusion of some spending that was deferred from year 1, we increased our actual spending percentage to 83% of average pre-retirement spending. As of this time, our annual retirement spending is now closing in on our pre-retirement spending level. Will it always be this high? Not necessarily because our spending includes both non-discretionary and discretionary expenses. We can always take our foot of the gas pedal of spending and reduce the rate of our discretionary spending.

Lessons Learned

  • Having a budget is essential for determining how much you will need to live on
  • Fund spending in a prioritized manner. Non-discretionary expenses (needs) take precedence over non-discretionary expenses (wants)
  • Break down non-discretionary expenses into the component pieces such as individual projects, trips, restaurant spending, entertainment spending, personal services and rank them in terms of importance.
  • Allocate available non-discretionary funds to discretionary expenses based on their ranking or importance
  • Be prepared to make trade offs between various non-discretionary expenditures
  • Maintain discipline!


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