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How Long Can You Fund Your Lifestyle?

July 14, 2020

No one likes budgeting, but it’s important to make sure you’re not spending beyond your means, especially if your income is notably reduced when you retire. In fact, that’s the goal of retirement — if you save up enough money, you can live off your assets, interest, and appreciation from the day you stop working until the day you die.

But how much money do you actually need? If your income stream stopped today, how long could you continue to pay your bills? And more importantly, how much wealth (and what kind of wealth) do you need to accrue in order to meet that goal? Here’s a simple way to approach the problem.

Make a List of Your Needs

First, you need to know what you need the money for. We use the word “needs,” but your list can be any aspect of your lifestyle that you want to carry forward. You’re in charge of determining what your lifestyle will look like, so the list is up to you.

First will be essentials like food, clothing, maintenance, housing, travel, and regular large purchases. Then, try to take into account the money you might spend on your family — gifts, allowances, tuition, wedding expenses, help with buying their own home, and so on. Finally, consider a third category of community-minded spending such as charitable giving, donations to your alma mater, and other philanthropic endeavors.

Estimate the Cost of Each Need

The next step is to quantify the cost of each of those expenses. You don’t have to nail down the exact dollars and cents of each category — after all, there will be considerable wiggle room over the next few decades as prices change. But you should try to find a rough number for how much you spend on yourself, your family, and other causes.

Determine How Long You’ll Need Each Expense

The next consideration is time. You might be spending thousands of dollars a month on housing right now, but your mortgage will be paid off by the time you retire. You’ll probably also take on expenses as you get older, like medical care or expenses for your family.

That means taking a guess at your life expectancy, too. No one likes to guess when they’re going to die, but life expectancies are always on the rise and you don’t want to run out of money with ten years left to go. You might be surprised to know that as of 2015, more than one in five men and more than a third of women at the age of 65 could be expected to live past 90. As such, it’s entirely possible that you’ll need to plan for a financial future of 30 to 40 years after you retire, and even more if you retire early.

Add a Margin of Error

It’s essentially impossible to predict what the future will look like, and you don’t want to put your life savings into airline stocks only to find that someone’s invented teleportation. Obviously, that’s a nonsensical example, but the point stands.

The real takeaway is that your level of uncertainty should be tied to the aggressiveness and risk of your investments. If you’re very confident in the amount you want to have set aside, you’ll need a larger amount, but it can be more conservatively invested. If your expenses aren’t set in stone, you can be a little more aggressive and take on greater risk — if your investments don’t quite pan out the way you wanted, you can simply spend less on that expense.

Talk to the Experts

Financial planning for the future is inevitably complicated, and that’s especially true when you’re talking about planning for the last third of your life (and even beyond). You need the help of the experts at First Western Trust Bank, who can examine the ins and outs of your assets, your goals, and your priorities. If you’re ready to start taking the future of your finances seriously, contact us today.

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