How Much -- or Little -- Will You Really Spend in Retirement?

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Retirement planning is ultimately a math equation: Plug in several variables,and estimate whether the amount you'll have will pay for what you need. The snag is that many of these variables are future values that we don't know today -- but that doesn't mean we can't make some educated guesses.

Let's look at the "what you'll need" part of the equation -- that is, how much the retired life will cost you each year.

The standard rule of thumb is that retirees need 70% to 80% of their pre-retirement income. To see whether this guideline has any basis in reality, let's look at how spending changes as we age by consulting the Consumer Expenditure Survey, produced every year by the U.S. Bureau of Labor Statistics (motto: "You're more than a statistic, but not to us").

The following table highlights the average income and expenditures of households where people in varying age groups are in charge.

The decline starts at age 55
As you can see, expenditures peak somewhere between ages of 45 and 54 and then gradually decline. Let's look at the reasons.

Fewer people are under the roof. Eventually, the kids leave the house and become adults, and you don't have to spend so much on food, utilities, education, and Febreze. Also -- and this is the sad part -- a spouse will pass away. When a two-person household shrinks down to a one-person household, expenses decrease by approximately 30%.

We eat less as we age. As our metabolisms slow down, so does our need for calories. Unfortunately, another reason some older people eat less is increased difficulty with shopping and cooking.

We eventually pay off the mortgage. Fifty-five percent of households in the 45-to-54 age range have a mortgage, whereas just 13% of the 75-and-older crowd still have that monthly payment.

We just slow down. As we age, we spend less on entertainment, clothes, travel, and other semi-discretionary expenses. As a writer and former English teacher who is married to a writer, I was heartened to see that expenditures on "reading" increase as we age, with just a slight dip after age 75.

We don't save for retirement forever. Once you retire, you'll stop paying the 7.65% FICA tax, which funds Social Security and Medicare, and you'll stop contributing to your 401(k)s, IRAs, and other savings vehicles. This alone could shave 15% to 25% off your pre-retirement expenses.

Uncle Sam likes older people. Senior citizens pay much less in taxes, for several reasons: They receive a higher standard deduction; most Social Security is not taxed; and other sources of income -- such as qualified dividends, municipal bond interest, and long-term capital gains -- are taxed at lower rates than ordinary income. Plus, as you can see from the table, income declines as we age, which puts most older people in the bottom two tax brackets.

Not every expense decreases as we age -- notably, healthcare costs go up. But on the whole, the evidence indicates that the old rule of thumb -- "you'll need 70% to 80% of your pre-retirement income in retirement" -- is grounded in reality.

But what if you're not "average"?
Although the average retiree spends less than the average 50-year-old, this is not the case for every retiree. Many spend quite a bit more, especially in the first few years of retirement, as they fill their newfound free time with travel, hobbies, classes, and other forms of recreation. Others find that their income needs drop to half of their pre-retirement income levels.

So when it comes to your own financial planning, especially once you're within a decade of retirement, it's important to look at your budget and estimate how much you will actually need after you kiss the boss goodbye.