An often quoted figure is that most people should budget on needing an after tax income equal to at least 80% of their pre-retirement spending once they retire. Put differently, it is assumed that people will spend about 20% less after they retire than they did before they retire.
Is this assumption realistic?
My initial reaction is that some expenses will go up and some will go down - and different people will have different spending patterns. In our own case:
1. the mortgage will be paid off - this is our biggest expense;
2. the children will still be in school or university so this will not change until some years after I retire;
3. food bills will probably go down as I will do more of my own cooking and eat out locally rather than in the more expensive CBD area but I do not expect the difference to be huge;
4. insurance costs will go up. We currently benefit from subsidised medical and life insurance premiums through our employers. This will stop once we retire;
5. other household costs will remain unchanged except electricity which will go up as we will be spending more time at home;
6. we are likely to go out more, travel more and spend more on hobbies simply because we have the time to do so - there will be a significant increase in spending in this area;
7. I have no idea what will happen to taxes in the future.
In short, if the mortgage factor is excluded, I expect our post retirement spending to be higher than it will be before retirement (at least until our children have finished their education and started paying their own way). At least in our case, the 80% assumption is not justified.
Did I miss anything?