# How Much Will You Spend in Retirement?

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To reach Financial Independence and retire, you **need to know how much you will spend while retired**. If you are retiring next year, knowing how much you will spend is straightforward. However, if you will retire in a long time, it is not trivial to estimate how much you will spend in retirement.

I have already discussed the different ways to reach Financial Independence (FI). Regardless of which method you choose to reach FI, you will **need an accurate estimation of your retirement expenses**. Without this, you will not be able to know how much of the road remains.

You could think that you will spend precisely the same as now. But this is wrong in most cases. You need to take many things into account. For instance, you will typically pay lower taxes. But your health expenses are likely to increase. And inflation will increase your costs significantly over the years.

This article covers the main points that will impact your retirement spending. It is not a surefire way to estimate how much you will spend in retirement. But it will help if you want an accurate estimation.

## Taxes

**Taxes **will be the item that **will change the most** after retirement. Taxes will highly depend based on where you live.

The income taxes will decrease since your primary income will go to zero. However, you may still have to pay taxes if you have more revenue from a side hustle. It will depend if you intend to continue on your side hustles.

If you have to pay net worth taxes (like in Switzerland), they will not change in retirement. So you need to consider the total amount of your net worth taxes. But if your retirement is far, you will have a higher net worth by retirement. And as such, your capital taxes will increase by the time of your retirement.

In retirement, you will have to get money from your net worth. There are two means for that. Either you get dividends from your portfolio, or you sell some shares. If you get dividends, you may have to pay taxes on dividends. On the other hand, if you rely on capital gains, you may have to pay taxes on capital gains. For instance, you will pay taxes on your dividends but not capital gains in Switzerland.

On the other hand, many of your current deductions will not be possible later. For instance, when you retire, you cannot deduct your transportation costs or contributions to the third pillar. The loss of reductions may make your taxes increase. And you will still have to pay taxes on the first pillar pension.

As you can see, this is **not a simple matter**. It is challenging to estimate how much taxes you will pay after retirement. But this is important. For instance, we pay both income and capital taxes in Switzerland. And dividends are taxed as income here. However, we do not pay taxes on capital gains.

I expect our taxes to go down significantly when I retire. However, they will go up until I retire because of our increasing net worth and income. But I still expect fewer taxes than today when I retire. I would say I will pay around 60% fewer taxes than now.

Once you retire, you may have opportunities for geo-arbitrage within Switzerland. Geo-Arbitrage could be a great way to reduce your retirement spending.

## Health

**Health costs are generally going up** as you get older. As a result, health expenses will drive up how much you will spend in retirement.

You will pay more for health insurance and more for doctors in general. Health expenses are something fundamental to consider. You do not want to go cheap on your health.

I expect at least a 50% increase in health costs by retirement. Our health costs are already high, but they will become a significant part of our budget once we retire.

For more information, I have an entire health insurance guide for you!

## Housing

**Housing expenses** will likely change by the time you retire.

If you own your house, you may continue to amortize your house, and as such, **your mortgage interests will go down every year**. If your interest rate is fixed, you are safe from interest rate increases, at least until you renew your mortgage. But if your interest rate is variable, it is more difficult to estimate the interest on your mortgage. You should also consider fixed costs for your house and maintenance. These are likely to increase over time.

On the other hand, if you rent, it is more likely that the rent will go up. Generally, **rent prices increase over time**. Of course, you may be lucky, and your rent may go down. But you should not count on that. Finally, you must consider where you buy a house between now and retirement. In that case, you have to change your estimate completely.

There is also one particular case to consider. If you have kids now in your home, you may not have kids at home when you retire. That means you probably do not need a big house or apartment anymore. So that means you can reduce your expenses. But most people do not move when their kids move out.

## Food

Generally, your food budget will not change in retirement.

However, there is one thing you may want to consider. **The number of people who eat your food may change**. For example, if you have children, they may leave the house before you retire. But if you plan to have children, you may retire with children at home. In this case, your food budget will increase.

Some people will also eat out more after retirement. There are just more occasions to eat out. On the other hand, you will likely be at home for your lunches instead of at work. That will make a difference as well. You need to consider both things in your estimations.

## No more work

Not having to work every day may make some difference in your budget.

For instance, you will likely have to spend less on commuting. For some people, it also means you will not have to spend money on nice work clothes.

On the other hand, you may **lose some benefits from working at your current company**. Some people have a gym at work, for instance. However, it means they must pay for the gym after retirement (or do their gym at home).

If you are surprised by this item, you may want to read about how much you spend on work.

## Retirement Benefits

On the plus side, you may enjoy **some retirement benefits** in your country. These benefits could reduce how much you will spend in retirement.

In Switzerland, several things are cheaper once you reach retirement age. Moreover, you can also get the money from your three pillars once you retire. You should account for your second and third pillars in your net worth. However, the pension from your first pillar may help you with some nice passive income.

But something is essential. In most countries, you will not get retirement benefits until you reach your official age. For instance, in Switzerland, that means you will not get your benefits until the age of 65 for men and 64 for women.

So, if you plan for early retirement, you must account differently for the years between your early retirement and the official one.

## More time – New hobbies

There is one thing that people do not take into account for retirement. They **will have plenty of time on their hand**. That means you will do something during that time.

Some people will **travel more and go more outside**. That means they will have to pay extra money for their time. Having more time is not a bad thing, of course. But this is something you need to take into account. For most people, their entertainment budget will increase in retirement.

It should not be a big deal if you only have frugal hobbies. You will enjoy your hobbies with a lot more time and not spend more money than now on these hobbies.

It may sound counterintuitive to some, but having more time may cost you more. Most people will not think of this when estimating their retirement expenses. But this is important!

## Inflation

**Something vital** you need to take into account is **inflation**.

Every year, the average price for consumers increases. Inflation is the rate at which the prices are rising. It can be negative, in which case the prices decrease. But over the long term, it is going up. So even though you may spend 20’000 dollars annually today, it could significantly increase due to inflation.

Now, **nobody can predict inflation** over a long period in the future. So you need to estimate the inflation per year. You can take the average inflation over the last ten years as a benchmark. For instance, this would give you around 1.6% per year for the United States. For Switzerland, it was negative on average between 2010 and 2020, with an average of -0.38% per year (as of 2020).

You should be a bit conservative with your estimates. Inflation may go up in the future. In this case, it is better to count on more inflation than average. I would account for at least 2% inflation per year for the United States. And for Switzerland, I would account for at least 1% per year.

And do not forget that inflation also compounds! Ten years at 2% is not a 20% increase! It is 21.89%. You need to take the inflation rate at the power of the number of retirement years. We take a few examples with 20’000 dollars of base expenses:

- In 10 years, at 1% inflation per year, you will spend 22092 dollars.
- In 20 years, at 1% inflation per year, you will spend 24403 dollars.
- In 10 years, at 2% inflation, you will spend 24379 dollars.
- In 20 years, at 2% inflation, you will spend 29718 dollars.

As you can see, **the impact of inflation on your retirement expenses is far from negligible**. Therefore, you need to take inflation into account.

## Margin of safety

It is difficult to estimate what you will spend in retirement. Therefore, it would be wise for most people to have a margin of safety.

For instance, if you estimate your retirement expenses at 100’000 CHF per year, you may want to account for 110’000 CHF. That way, your retirement plan can handle a 10% increase in expenses.

It will also mean increasing your chances of a successful retirement.

How much margin of safety you use will depend on your capacity to take risks. For some people, 1 or 2% will be enough. But most people will need at least 5%.

For us, I will probably take about a 5% margin of safety before I retire.

## Update your estimation regularly

Until you are retired, you still have plenty of opportunities to update your estimation. I recommend redoing this exercise once a year or whenever a significant change in your expenses occurs.

Knowing when you want to retire and how much you will spend, you can check whether you are on track to meet your goal. For instance, you can compute your FI goal based on your expenses. And using your current situation, you can then know how many years you will need to retire. With this information, you can decide to change some things to reach your goal.

## Retirement Expenses Checklist

As a quick summary, here are **the main mandatory expenses in retirement**:

- Income and wealth taxes
- First Pillar (before retirement age)
- Rent (or mortgage)
- Heating
- Health insurance
- Civil Responsibility insurance
- Household insurance
- Electricity
- Internet and mobile

None of these expenses will disappear in retirement, so you should be prepared to pay them!

## How much will we spend in retirement?

We are very far from retirement and Financial Independence. So, we only have a vague idea of what we will spend in retirement.

As an estimate, we are taking our current expenses. But we already know that many things will change since our mortgage will get lower and our taxes will get much lower. But we plan to have kids, so if we retire while the kids are still at home, we may spend more than planned.

We are currently spending about 60’000 CHF per year without taxes. We will spend about 70’000 CHF per year in retirement with taxes. But, of course, this is a rough estimate of what we will spend in retirement. It will depend if we retire with young children, for instance. And I will add at least 5’000 CHF as a margin of safety.

The closer you are to retirement, the easier it will get to estimate your expenses.

## Conclusion

Estimating how much you will spend in retirement is **essential if you want to retire early**.

You need to know how much you will spend if you want to have enough money to cover your expenses. Whether you cover your expenses by passive income or capital gains, you need to know when you are financially Independent.

However, estimating your retirement expenses is not straightforward. You need to take many things into account. In addition, you need to update your estimate every year. Your estimation will become more and more accurate as you get close to retirement.

If you want to be safe, you may want to increase a bit your estimated retirement expenses. It will depend on your risk aversion and your confidence in your estimation. A margin of safety will make your retirement safer.

Now that you know how much you will spend in retirement, you can easily calculate your Financial Independence (FI) Number.

How do you estimate you will spend in retirement? Have you ever done this exercise?

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Hi Baptiste, thanks again for another great post helping to calculate our trajectory to FI!

Could you please quickly elaborate on what you mean by “First Pillar” in your section “Retirement Expenses Checklist”? I thought the First Pillar would only be an income by retirement age, there wouldn’t be any contributions (expenses) by this time? But perhaps I missed something!

Hi Ben

Good question. When you retire before the retirement age, you will still contribute to the first pillar, based on your wealth.

But this is indeed only in the case of early retirement.

Got it now, that makes sense. Where could I find some details how to calculate the level of this contribution based on wealth?

You can find here for instance: https://www.ahv-iv.ch/p/2.03.f

(Page 6 is the table)

Hello,

I have been computing my taxes amount when I retired and you will be shocked to see that it doesn’t decrease hat much, there are lot of deduction that will not apply, such as the 3a, professional expenses, etc. on top if you take the pension, you will be taxed on it, you will pay taxes on the AVS.

So I recommend you to take time to simulate it.

I just discovered your blog, well done and continue, you will help a lot people.

Cheers

Hi,

It will not decrease that much compared to now. But it will still decrease significantly compared to just before retiring. At this stage, you will be paying net worth taxes that will not change in retirement but your income will very significantly drop (for most people) after retirement.

But you are correct that you will lose on many deductions that can be used now and can’t be used after.

Currently, my assumption is that I will spend exactly the same amount of money (taxes included) in retirement. This is a good estimation for 20 years in the future since I update this every year.

Thanks for stopping by!

It is impossible to give perfectly accurate information. It can be different from different countries. The cost of living in each country is different. It is known by all that as the age increases, the cost of travel and the cost of medicine increases day by day. In that case, he should have double the cost of his money based on his own country. In this case, a suitable plan is to be made and it’s very important before retirement. That’s all.

Hi Millionaire Mob,

I completely agree that it is impossible to make a perfect estimation. It must remain an estimation in the end.

As you say, there is a lot of difference between countries. You have to estimate the cost for the place you want to retire. There is no global strategy to compute this.

Thanks for stopping by :)

As Swiss, an obvious idea is to retire abroad.

Portugal, Spain, Asia all come to mind. While it may be difficult from a social life perspective, it would be a big change in purchasing power for anyone living in Switzerland.

Hi Nick,

Yes, if you are Swiss, you can more easily retire abroad. Our spending power is much more in other countries than it is in Switzerland.

Personally, I do not want to do that, but it is a good option for most people.

Thanks for stopping by:)

Yes, I have done this calculation, using Excel for the next 45 years [I have 54 years]. For each month, total income, and total consumption. Total income is from dividends taxed, a chunk from capital [to deplete it], state pension indexed with CPI inflation [2%-3%] (for each country). Then taxed in residence country [destination]. For consumption, each category indexed appropriately – electricity by 5%, food + travel by 4%, discretionary by 2% etc. [Country (which one?) CPI/inflation will not be my personal inflation!]. You can choose our own %. The NPV (net present value) of total consumption is a curve, with “U” shape, minimum at near 70-75 years old, then the cost increases, as medical bills can rise AND life expectancy decrease [so I will burn the money faster]. In real terms, consumption is increased approx 1%-2% every 5 years, as getting older will change my wiling to travel or need for food.

Hi John,

Wow, you really did it thoroughly. I did not do anything so thorough yet. Because I am too far from retirement. I am planning to improve my estimated spending over time. It has only been a bit more than one year since I started the improvement of my finances. I plan to update my retirement spending estimation every year to get closer to what I will really spend.

Thanks for sharing your technique!