FIRE.013 Retirement Magic Wand – Spend like your retired

Did you know there’s a magic wand for pre-retirees? A magical preparation step for retirement that many don’t even think about. Before you pull the trigger announce your awesome retirement party, it is so very advisable to live a year (or two) on your projected retirement income stream. If you’ve structured your spending correctly, your money will last until the end of the month. Nice and simple.

Magical? What? Why go through this process? One; you’ll spend less. Since your retirement income stream will probably be lower than your working income. You will be forced to lower your spending rate (even showing you what your actual spending is if you haven’t tracked it). Two; you’ll save more. Since your spending rate may have been forcefully lowered, this should allow you to save more which bulks up your assets. Three; this may force you to track your actual spending. Four; the new spending rate could help set a benchmark for your level of spending for the future. This process should absolutely lower the shock of less income/money after retiring.

If your nest egg is all set (and full), then in your final working months you should consider spending—taking some of those big trips, or doing some of the big house projects you have been planning. I say make some of the large purchases while you’re still working. It feels really nice vacationing while getting paid from your employer, all the while knowing you’re not using your savings. House modifications actually feel less expensive when your paycheck is going to the contractor rather than lowering your nest egg.

Consider using some of these final paychecks as playchecks. The last few months of working, or even adding a few months, won’t feel so bad when you’re living it up in a pseudo-retirement.

Have you heard you should plan to spend only 80% of today’s gross income in retirement? The idea being that you wisely saved 10-15% of your gross income and employment taxes claimed another 7.65%. This leaves you with approximately 80% of your gross income before income taxes. The exact same taxes you will pay on ordinary income (pension, qualified withdrawals, etc). Why base your retirement spending needs as some random estimate of income? Instead, base your retirement spending needs on what you’ve historically spent.

In our experience, we spend nearly exactly the same in FIRE as we did while working. NOTE: it takes some effort to keep the spending down to our pre-FIRE rate…

I believe the reason retirement spending can be a challenge is because having more time for yourself can often mean more activities and activities often cost money. Even if you’ve read about wasting money on workday lunches or coffee breaks to Starbucks, those two “free time” windows at work will pale in comparison to having your ENTIRE day(s) free. There is so much time to spend money in retirement. Oh, so much time in your everyday life.

Give yourself a test run of your retirement income amount. The longer the test run, the easier the transition will be when you are FIRE’d.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.