The dream retirement is early, essentials covered, and enough discretionary expenses to have lots of fun. We dream of living on Easy Street. Well, that’s my dream and I’m doing my best to at least live one block over from Easy Street.
But that’s not reachable for most retirees. We all know the horrible retirement statistics so I’m not going to repeat them today. The most basic of retirements is to cover your needs or essential expenses. Sure, it would be great to spend $25,000 per year on travel but let’s cover the food and home bill first.
I remember a conversation with my retired dad a few years back. He said that he’s found that having about $2,000,000 in retirement investments should provide a comfortable lifestyle. Assets are critical but its what cash flow you can generate with those assets that is important.
I’ve run several cash flow scenarios the past couple of blogging years but today will be unique. I’m going to run a cashflow exercise that doesn’t include my investments. How’s that for weird?
Instead, we’ll “pretend” that I’ve got nothing but my pension and social security to pay the bills. It’s my plan to use only those cash flow vehicles to pay essential expenses so I better run the numbers. Cash flow is my reality as it relates to essential expenses. As I wrote last year, better they devil you know so let’s get to it.
Essential Expenses
What is an essential expense? These might be slightly different for some people but for most of us they include things like:
- Home – mortgage/rent, utilities, home repair, insurance, taxes
- Transportation – car payment, repairs, insurance, gas
- Grocery Items – food
- NOTE: I differ from some people because I combine most things I buy from Albertsons, Fry’s, Walmart, Costco, or other grocery stores because I don’t like separating food purchases from household cleaners from personal hygiene items.
- Healthcare – dental, vision, medical, medicine, insurance premiums
- Pet Care – pet food, cat litter, veterinary visits
- Other Expenses – clothes, personal items, and other miscellaneous essential expenses
Actor Nicolas Cage’s view on essential items once included multiple homes, a nine-foot-tall burial tomb, an octopus, shrunken pygmy heads, a $150,000 Superman comic and a 70-million-year-old dinosaur skull. He should have had a better understanding of essential versus discretionary.
Since I track my current expenses, here’s my best guess at what essential expenses might look like in retirement. Each expense category has it’s own inflation percentage. Remember, this is just to keep me and my wife alive in our current essential lifestyle.
Another thing to remember is restaurants, travel, and hobbies are discretionary so they won’t show up in this exercise. Those expenses will be covered by my investment portfolio.
It’s crazy to think that I’ll need $121,063 just to cover essential expenses when I’m 90. That’s the destructive power of inflation and it’s why we need to hold assets that have growing income. Dividend growth stocks are a great example.
Let’s Run The Numbers
So many times I’ve seen people near retirement and they have no idea what their expenses will be. I just don’t understand that mentality. It should be the first thing you know before you start counting all your sources of income.
My sources include:
- Pension – At 62, I’ll have 27 years of earning a non-COLA pension
- Social Security – Take it at 70 and then my wife will get 1/2 of that amount
- Retiree Health Benefit – At 65, my company pays me $5,000 for my wife and I to get supplemental health insurance
- Small Pensions – I’ve got a small 2nd pension and my wife worked part-time for a school district for a few years.
According to the numbers, I’m green every year with a surplus low of $6,950 (at 69) and a high of $42,754 the next year. They important part is that I’m forecasted with a surplus every year. This means I don’t have to use my investments to cover any essential expenses.
At least that’s the plan. Also, I expect to save the surplus income to cover unexpected and/or large essential expenses like replacing my air conditioning unit, a new roof, or another car.
Summary
Seriously, I don’t know what my essential expenses will be (especially healthcare) and I’m not quite sure exactly what my income will be either. But with each year I get closer and my forecasting gets more accurate.
These forecasts help because they give me idea of what kind of retirement I’ll have. Knowing that I’ll have nearly complete control of my discretionary spending out of my investments is comforting. It means I don’t have to spend much if the markets are hitting my portfolio in a bad year.
The dream retirement is early, essentials covered, and enough discretionary expenses to have lots of fun.
The first sentence of this article
If the above quote is true then I’m in pretty good shape. I’ll be retiring at 62 (which is a little early), my essentials seem to be covered, and I’ll have over $1,000,000 in investments to cover my fun and any many health issue. It almost looks like my dream retirement is only four years away.
And yes, cash flow is retirement is critical. It’s important to that you have the ability to turn your assets into retirement cash flow. What good is $1,000,000 in home equity if you can’t put food on the table? My pension and social security will keep me living and that is a huge comfort.
Thanks for reading!
Mr. TLR