I assume my budget will look different, but would like to live on the same income in today's dollars. I know some things will be cheaper, but may be replaced by other expenses - ie not feeding kids at home, but will be taking kid's families out to eat periodically, not fueling up to go to work, but traveling more, etc. Other expenses, like investing in retirement, go away entirely. Probably have to think about this one and your lifestyle goals in retirement for yourself.
My rule of thumb:
- Take today's budget minus investing contributions and other major changes (ie, not paying taxes on roth accounts, no mortgage payment, etc).
- Divide by 4% (Drawdown rate, calculated by Average market returns (8%) - average annual inflation (3%)-margin (1%)).
- Mutiply by (1.03)^n where n is the number of years from retirement to account for inflation from now until I retire.
Example:
- $125000 annual budget in today's dollars - minus mortgage ($10,000/yr) and IRA contributions ($15,000/yr) = $100,000 in today's dollars.
- $100,000 divided 4% is $2.5 million needed to retire today.
- If I plan to retire in 25 years, the inflated value of that figure is $5.23 Million.
- At 4% drawdown on $5.23 Million, the annual income in 25 years is $209,000.
- $5.23 million gets 8% in the market, so it goes up $418,000, which will cover the cost of year 26 income and cover year 26 inflation (and some risk) - repeat year-over-year. That $5.23 Million is theoretically sustainable income
