Do not assume your expenses will decrease after retirement!

/ M. Pattabiraman / @pattufreefincal / 32 Comments

Published: July 14, 2015 at 10:01 am

Last Updated on January 3, 2016

So many people have told me,  one should assume that expenses will decrease after retirement due to a change in lifestyle, that I am now convinced that it is a cognitive response to avoid pain.

The pain associated with staring at the results of a retirement calculation made with meaningful inputs.

It is abject cluelessness when a 35-year-old states, “my expenses will be lower when I turn 60 because I will travel less, eat out less etc.” Between now and then, there could be several unexpected expenses and health is only one of them.

When I cannot say for sure that the next months expense will be the same as this month, how on Earth can one assume that expenses will decrease after 25 years!

One for the first entries in a retirement calculator is current expenses

“What should I enter here?” is a common question.

Any expense that you are sure will not persist in retirement can be safely excluded from a retirement calculation.

For example,

  • the cost associated with children’s education, which can constitute anything between 10-20% of your annual expenses can be safely excluded. Thanks to AIFW members for this input. See thread here (will only work for members of AIFW logged into FB)
  • Their pocket expenses or any fee paid for their extracurricular activity can be excluded.
  • Home loan EMI should be excluded.
  • If your daily commute to work is quite long and you not  compensated for it, a good chunk of it can be excluded.
  • If you travel only a few kilometers then it is best not to assume such commute will not exist post-retirement.

Other than this,  I think all other current expenses  should be factored in the retirement calculation. For the simple reason that the only way to plan for unexpected turn of events is to allow for a buffer in predictable expenses.

This calculation must be repeated each year. Each year the current expenses should reflect the actual current expenses, excluding expenses that will definitely not persist upon retirement.

The problem is, most investors do not realise that a retirement calculation must be performed once a year.

Each year the current expenses must reflect actual expenses, minus current* expenses/liabilities that will not persist in retirement.

  • school fees increase each year at an alarming rate (10-15%) – Thanks to AIFW members for inputs.

This exercise must be repeated once a year before and after retirement. Yes, retirees need retirement calculators too!

Will only take a few minutes of your time.

 

This way there is no speculation associated with current expenses. The transition into retirement would be seamless.

I would  bet that expenses will also evolve seamlessly across retirement, without any big jumps.

This method ensures lifestyle creep is accounted for smoothly.  You are so used to the gadgets that you use today, that it would be impossible to discard them after retirement. You would most likely be using the latest version along with newer  gadgets picked up along the way.

Subra often points out that it is quite possible that expenses may increase in retirement. This could be because of good reasons, like more travel or bad reasons like recurring medical expenses. An annual review should alert you regarding such developements as well.

Do not asume your current day-to-day expenses will decrease upon retirement. Instead, only eliminate all expenses that are unlikely to persist in retirement while using a retirement calculator. Renew inputs each year.

Rinse and repeat.

Do share if you found this useful
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps