How Much Will Lisa and George Need to Save for Retirement?

This story by Lisa and George is an example of knowing your spending habits. It is part one of “Understand Your Retirement Budget—Know Your Spending Habits.” Let’s hear it from Lisa and George.

Lisa, 52, and George, 56, are a married couple. Lisa works as a store manager and makes $52,000 a year. George is a project manager for a small construction company and makes $120,000 a year. After-tax, Social Security, and 401k contributions, their combined take-home income is $108,000.

Why it’s Important to Track Expenses

Tracking expenses is an essential part of understanding your finances. It allows you to see where your money is going and identify areas where you can cut back. This can help you save money for your goals, such as retirement or a down payment on a house.

Lisa and George’s Spending

The table below shows Lisa and George’s fixed, variable, and discretionary expenses. They have been tracking their spending since Lisa was 49.

Remember, fixed expenses like rent, car payments, and insurance are the same every month. Variable costs, such as groceries, gas, and utilities, can change monthly. Discretionary expenses are optional spending such as entertainment, dining out, and vacations.

Lisa and George’s Situation

Lisa and George’s estimated monthly retirement expenses are $5,805 (based on the table you provided). To calculate how much they would need to save for retirement using the 4% rule*, we can follow these steps:

1. Annualize their expenses: Multiply their monthly expenses by 12 to get their annual expenses: $5,805/month * 12 months/year = $69,660/year
2. Apply the 4% rule: Divide their annual expenses by 4% to get the total amount of retirement savings they would need: $69,660/year / 0.04 = $1,741,500

With their decision together, they decided to pay off the house and car before they go into the retirement stage, so they have estimated expenses in the table below.

According to the 4% rule, they would need to save $1,741,500 for retirement. However, since they plan to pay off their debts before retiring, they estimate they will only need $1,065,000.

*The 4% rule is a shortcut for retirement savings. Imagine your retirement nest egg is a magic money bag that refills 4% annually. That 4% is your safe spending money in retirement, adjusted for inflation each year. It’s not perfect for everyone, but it’s a good starting point to guess how much you need to save.

General takeaway:

This is just a sample scenario, but tracking your expenses can significantly simplify figuring out how much you need to save for retirement. Understanding where your money goes allows you to determine your spending and saving habits to ensure a comfortable retirement.

Remember:

• Everyone’s situation is unique. Your retirement needs will depend on your desired lifestyle, health factors, and potential sources of income, such as Social Security.
• This example uses the 4% rule as a rule of thumb. It’s a good starting point, but consult a financial advisor for personalized retirement planning based on your circumstances.

You can explore retirement budgeting tools on websites like Mint for tracking expenses or Fidelity’s Retirement Income Planner.