“How much in retirement savings do I need?” is the one question that dogs people as they plan for life after work. The real answer is impossible to know, but you can make retirement plans based on the cost of living in your area, your current expenses and the savings you have amassed.

While I was researching this question, I saw an interesting example that neatly illustrates a point – just not the one the author was trying to make! The hypothetical example involved a person who made $80,000 annually for retirement and had a retirement savings account worth $500,000. Assuming a four percent annual draw-down (the maximum amount most investment advisors recommend withdrawing), that would leave our hypothetical retiree with an annual income (before taxes) of $20,000.

I’m not you and you’re not me, but I wouldn’t want to try to downsize my lifestyle by 75%, retired or not! (Would you?) One-third of workers plan no major spending changes after retirement – much less a 75% drop in income! Even if you supplement that $20K with Social Security payments – the current average is about $1,100 monthly – you’d have a maximum annual gross income of $33,200. Depending upon where you live, your health coverage and your expenses, that might work for you or it might not.

Some experts estimate that a person over 65 can expect to spend as much as $250,000 during the remainder of his or her lifetime on unpaid or uninsured medical expenses. If our hypothetical retiree needs to reserve half of that nest egg for medical expenses, s/he just took a 50% pay cut on top of the 75% pay cut s/he received upon retirement.

For me, that hypothetical example illustrates the need to live cost-effectively. Rather than downsize your lifestyle by 75%, wouldn’t it make sense to move someplace where things cost 75% less than they do here? To me, it makes more sense to make your dollars go as far as possible than squeeze into an uncomfortable retirement lifestyle and risk running out of retirement savings when you’re too old to go back to work.

Think such a place doesn’t exist? Wrong. The cost of living in Mexico is 50% to 75% less than it is in the US. Major expenses – housing, food, medical and dental care, prescription drugs, transportation and energy are all highly affordable here. The weather is beautiful and prime real estate is a bargain. Before you dismiss a Puerto Vallarta retirement, ask yourself this: how much of a pay cut are you willing to take when you retire?

Photo Credit: Sophie