Do not assume your expenses will decrease after retirement!

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.

❖

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About the Author M. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

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