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Thayer Partners Blog

How Much Will Retirement Cost?

[fa icon="calendar"] Jul 15, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

How_Much_Will_Retirement_Cost.jpgIt’s the ultimate question Americans have about retirement: How much will it cost? Knowing exactly how much retirement will cost seems to require a crystal ball—but there’s an easy way to do some forecasting.

The 4 Factors Model

Once you’ve decided on your goals, you can start to figure out exactly how much retirement will cost. You’ll need to think about 4 major factors that will determine the cost of retiring: non-discretionary spending, discretionary spending, inflation, and the investment time horizon (i.e., your life expectancy). Considering these 4 factors will help you come up with a preliminary budget—and a very good prediction of how much your retirement will cost.

Non-Discretionary Spending

Non-discretionary spending covers your basics; these are the expenses you can’t live without, like food and shelter. In fact, your living expenses are the first thing you’ll consider under the category of non-discretionary spending. This includes everything from gas to groceries, and all that’s in between.

Next, think about your debt. If you have credit card debt, a mortgage, or car loans that will carry forward after you retire, you have to factor in those payments. You’ll also be paying taxes still, although you might pay a lower amount as a retiree.

Finally, you’ll need to pay insurance and health care costs—and you’re more likely to need these services as you grow older. If there’s an emergency, will you be prepared to pay for it?

Discretionary Spending

This category includes your non-essential spending. While many people would consider certain things, like television or the internet, a necessity, the fact is that you can survive without these conveniences. Of course, you want to have a comfortable and pleasant retirement, so you’ll want to be sure you budget for keeping the things you most enjoy, like access to cable or the internet. You’ll also want to consider other discretionary items or even luxuries, like travel expenses if you plan to go globetrotting or indulging in your hobbies, whether it’s wood-working or knitting. You’ll want to consider your family as well. Do you want to help your kids out with their mortgage or maybe take the grandkids on a Caribbean vacation? If so, you’ll need to plan for this by factoring it into your discretionary spending budget.


One mistake too many retirees make is underestimating the impact of inflation on your purchasing power. Chances are you’ve seen inflation at work though: the price of gas, the price of housing—everything has gone up over the course of your lifetime. So chances are what you’re paying for gas now won’t be the same in 5 or 10 years. Your heating bill isn’t going to stay the same forever either. In short, whatever your budget is today will increase in the future if you plan to maintain the same lifestyle. So just because you have enough in the bank today to cover today’s expenses for the next 20 years doesn’t mean you’ll actually have enough for the next 20 years, all thanks to inflation. Inflation has averaged about 3.22% per year over the last century or so. Using this average rate of inflation, someone spending $50,000 today can expect to pay around $90,000 in 20 years to get the exact same products or services.

Investment Time Horizon

How long are you going to need your investments? That’s probably the biggest gamble retirees today take: They don’t know how long their investment income will need to support them. It could be 10 years, it could be 20 or 25. Some people have an extra long timeframe because they have a younger spouse who will likely outlive them by many years. If you don’t have a good and realistic estimate for how long you need your retirement savings and investment income, it’s likely that you’ll overspend and run out of money—a very real risk for many retirees. Estimate your horizon conservatively, and you’ll have a better idea of what you can spend.

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Topics: Retirement Planning

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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