How much do you want to spend during retirement?

6 min read    I     Date: 11 February 2022

If you have an existing desired spending amount, you could use the 4% Withdrawal Rate in the Trinity study as guidance to figure out the total amount you will need to retire comfortably. The famous 4% rule is based on a 1998 paper titled: “Retirement Savings: Choosing a Withdrawal Rate that is Sustainable” and is often referred to as the Trinity Study; three finance professors at Trinity University had authored the paper. 

To do that you need to:

1. Think about how much you want to spend during retirement. 
   Let’s say your desired spend is RM4,500 a month.
2. How much do I need for retirement to afford the desired amount?
   Total:
   = (desired spend per year)/ 4%
   = (4,500* 12 )/4%
   = RM 1,350,000

So, in order to afford to live your desired lifestyle at RM4,500 per month, you need to have at least RM1.4 million as your retirement savings with you.

Figuring out your retirement expenses.

A good way to figure out your expenses is to break them down into three buckets: must-haves, wants and contingencies. Your retirement fund should prioritise expenses such as food, healthcare and bills, and any debt that still needs to be paid off. Ideally, you also have a contingency fund for unexpected expenses and long-term care.

What are some must-have expenses during retirement?

To be very clear, must-have expenses are costs you’ll need to cover, regardless of your financial situation. Additionally, unlike wants and discretionary costs, must-haves may or may not be reduced or put off depending on one’s situation. These include:

• Living costs (rent or mortgage, property taxes, general and life insurance, maintenance and repairs).
• Utilities.
• Mandatory regular medical costs to cover monthly medical visits for issues like hypertension, diabetes or cholesterol medication. 
• Unexpected health costs such as being treated for a car accident. However, you may be more disciplined in how you manage your must-haves. For example, the cost of groceries can be reduced by choosing the cheaper version of similar goods. Similarly, one can simply change their mode of transportation.
• Groceries.
• Transportation (car payments, insurance, fuel, maintenance and repairs).

What are some wants that you might have during retirement?

Wants are essentially any expense that can be put off or removed altogether if circumstances don’t permit. Only increase your spending if your investments perform better than expected, or you get a big bonus or windfall.

• Travel.
• Entertainment.
• Shopping.
• Eating out.
• Upgrading your house.
• Home renovations and/or furnishings.
• Above-average health care expenses.
• College tuition for your children.

Don’t forget to account for unexpected expenses or contingency costs too.

If the COVID-19 pandemic has taught us anything, it’s that we should always plan for the unexpected because life comes at you fast. Contingency plans also ensure that emergencies or unexpected events won’t take you by surprise—at least not by a lot. It could be a sudden health scare or maybe an unanticipated car repair. These scenarios could be harder to manage after retirement. 

Hence why it’s important to have sufficient money in both your savings and emergency funds. Many recommend retirees have a large emergency fund—about six to 12 months’ worth of expenses, compared to the typical three to six months for working people. Besides that, it’s also crucial that you think about your long-term care. Would you need personal care assistance at age 70? And if you do, are those covered under your insurance or is there separate long-term care insurance to cover this?

We do not recommend putting the burden of expectation on your child, though as Malaysians, I’m sure many would do so willingly—it’s too risky to depend your future on others and it may also be slightly unfair to expect them to take care of you. 
 

Make sure to factor in stability’s enemy, inflation.

There are three certainties in life, death, taxes and inflation. If you didn’t already know, inflation, which is measured by the consumer price index (CPI), is simply defined as the steady increase in the price of goods and services over time.

To illustrate this, let’s use an example of a plate of Nasi Lemak. The same portion of Nasi Lemak that had cost you RM 2.50 in 2011, would probably now be worth RM 5.00 in 2021 due to inflation. In short, inflation decreases your purchasing power and so you’ll need more money to cover expenses, pay your loans and debt. From an investing perspective, it would be a loss for you if the realized annual return of your investments is less than the inflation rate, which is also why you should be aiming for a return that exceeds the rate of inflation.

According to the Edge, Malaysia’s inflation rose 4.7% year-on-year in April 2021—the highest since 2018. The obvious signs of inflation that we are seeing today are educational and medical inflation. The good news is you will generally spend less post-retirement. As you reach your so-called golden years, if you’re lucky enough, you will, by age, spend less than before as many of your debts have already been paid off by now. 

At this age, you may be spending more time relaxing at home after having built a strong retirement fund for your future. You could expect to spend less on the following:

• Debt.
• Retirement savings.
• Everyday expenses that you normally would for work.

Alternatively, you could adjust your lifestyle and curtail your expenses. Of course, you’ll need to be okay with the idea of resizing or downgrading your lifestyle. Being more frugal helps you be mindful of the things you spend on. 

Now that we’ve gotten the expenses out of the way, it’s time to narrow down the income that you’ll need to generate to pay off your expenses and still live comfortably during retirement.

Related: How much savings do you need for your retirement fund?