We tend to think about retirement, naturally enough, in terms of saving. And as we get closer to the day we plan to retire, we start to think about retirement spending - or at least we should. But a disconnect happens for most people when they try to match what they have saved to what they think they'll need to cover their living expenses in retirement.
The reason is that throughout our working lives, income and spending are paired together. We know how much we make, and therefore we know that our spending should be equal to or (preferably) less than our income. When it comes to retirement, relating the lump sum in our savings accounts to spending is neither simple nor clear.
How Much Dough for a Cup of Joe?Here's an example: What if I told you that $9,701 for a cup of coffee is a good deal? Before you decide I'm crazy, consider this scenario: Let's say you are 55 and one of your favorite things to do on weekends is walk to your local coffee shop, buy a large cup and chat with friends. When you think about retirement, which you plan to do at 65, you imagine doing this every day. How much will that cost? Let's assume that today your coffee costs $1.95 per cup. And for simplicity's sake, let's remove inflation from the equation and assume the price of your cup will not change. That means:
- Each year of coffee will cost $711.75.
- Ten years of coffee will cost $7,117.50.
- If your retirement lasts 30 years, you will eventually spend $21,352.50.