Your Spending Dictates Your Retirement, not a Magic Number

A new client recently walked into our meeting, clutching a printed article with the headline, “Retirement Magic Number: $1.8 Million.” They were excited, thinking this meant they were on the fast track to early retirement. They had done the quick math and believed they were well on their way to reaching this so-called magic number. But as we dug deeper, it became clear that their excitement was based on a misunderstanding. Their lifestyle, spending habits, and unique financial situation didn’t align with the simplistic formula suggested by the headline.

In our opinion, headlines like these do not do anyone any good. Call them whatever you want—retirement numbers, magic numbers, or retirement rules of thumb—the reality is that there is no single number that works for everyone. A magic-number approach to calculating how much you need to sustain your lifestyle in retirement for 20 to 30 years often fails to paint an accurate picture of your future.

Without sounding like a broken record, your retirement is dictated by how much you spend. No one goes from living a $120,000 lifestyle filled with fancy cars, country clubs, and vacations to spending $50,000 in retirement. Your spending is the foundation for determining how much you’ll need to save for retirement. Unfortunately, many people don’t know how much they spend annually.

We’re not talking about a detailed budget breaking down how much you allocate to dining out. You need to know the net number—the total amount you spend. Before you invest in a ledger to track every cent flowing in and out of your household, let’s start with some “back of the napkin” math.

First, start with your gross income for the year. Next, subtract how much you saved both pre-tax and after tax during the year, for example saving to pre-tax retirement plans or if you contributed to an after-tax brokerage account or a Roth retirement account. Then, subtract how much you paid in taxes. The number you’re left with is a close approximation of your annual spending. If you didn’t save it and you didn’t pay it to the government, you most likely spent it.

Another way to calculate this is by reviewing your credit card statements from the past year. Add in any bills you pay by check, and again, this total will likely approximate your spending.

While some expenses in retirement will decrease—commuting, business lunches, and dry cleaning—others will increase, such as health care, travel, and entertainment. Keep in mind that those first few years of retirement are often filled with activities you didn’t have time for while working. That’s why we say you’re not going to go from a $120,000 lifestyle to a $50,000 lifestyle the moment you retire.

So, why do these “magic retirement numbers” exist if they’re wildly inaccurate? Likely, they’re designed to get people thinking about their own financial situation. Saving toward a goal number is easier than saving simply because you’re told you should. As investors approach that “magic number,” they’re more likely to seek the help of a financial planner to fine-tune the details: how long their savings will last, how it aligns with other retirement income sources like Social Security, pensions, or passive income, and how it should be invested to continue growing and sustain their retirement lifestyle.

If you have questions on how much you need to be saving for retirement, the experts at Henssler Financial will be glad to help: