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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You are absolutly correct in your observations.
You are absolutly correct in your observations.
Well said. Like everything else in personal finance, expenses in retirement depends entirely on each individual's situation. It varies based on lot of factors including your age of retirement, the level of active life you would like to lead, your personal health situation. We cannot generalise. The best thing is to track your individual family expenses and evaluate which of the categories of expenses will go up or go down and you may also end up adding additional categories of expenses.
Another rule of thumb that is used, which I can't relate is considering your expenses as a percentage of income. I know it takes a bit of work but it's got to be done.
With pattu's calculators most of that work is automated as well☺
Regards
Rakesh
Thank you
Well said. Like everything else in personal finance, expenses in retirement depends entirely on each individual's situation. It varies based on lot of factors including your age of retirement, the level of active life you would like to lead, your personal health situation. We cannot generalise. The best thing is to track your individual family expenses and evaluate which of the categories of expenses will go up or go down and you may also end up adding additional categories of expenses.
Another rule of thumb that is used, which I can't relate is considering your expenses as a percentage of income. I know it takes a bit of work but it's got to be done.
With pattu's calculators most of that work is automated as well☺
Regards
Rakesh
Thank you
bang on !!
bang on !!
with more time on hand post retirement expenses on hobbies and travel may in fact increase.
Certainly could.
with more time on hand post retirement expenses on hobbies and travel may in fact increase.
Certainly could.
That the expenses will reduce post-retirement is wishful thinking. However, there are cases where it does happen - more an exception than rule. My parents, for instance, have lower inflation corrected monthly expenses. Of course, it helps that CGHS covers literally all their medical expenses, some good gardening provides for wonderfully fresh and organic vegetables all year round. They manage to live comfortably with less than even 20% of their pension...
Agreed.
That the expenses will reduce post-retirement is wishful thinking. However, there are cases where it does happen - more an exception than rule. My parents, for instance, have lower inflation corrected monthly expenses. Of course, it helps that CGHS covers literally all their medical expenses, some good gardening provides for wonderfully fresh and organic vegetables all year round. They manage to live comfortably with less than even 20% of their pension...
Agreed.
Hi Mr Pattu
This is not related to this post. Can you or any one let me know the best / good online brokerage site to buy and hold stocks? I am not a day trader and this will be used to buy and hold only. Or are there any other options to buy stocks other than using online portals?
fyi - I looked at Sharekhan.com, reliance and icici..
Thanks,
Sorry, I know little about this.
Hi Mr Pattu
This is not related to this post. Can you or any one let me know the best / good online brokerage site to buy and hold stocks? I am not a day trader and this will be used to buy and hold only. Or are there any other options to buy stocks other than using online portals?
fyi - I looked at Sharekhan.com, reliance and icici..
Thanks,
Sorry, I know little about this.
Big issue is the Health expenses.Unfortunately this cannot be quantifed.Either you over estimate or under estimate.eg in case of paralysis one may require a full time attendent.Cost of Physiotherapy is another example.
Big issue is the Health expenses.Unfortunately this cannot be quantifed.Either you over estimate or under estimate.eg in case of paralysis one may require a full time attendent.Cost of Physiotherapy is another example.
Yes sir. Agreed.
Yes sir. Agreed.
In my opinion, one should put more money than current expenses. This is not only for unforeseen expenses but also for enjoy the post retirement life well. Everybody deserve it.
Agree. Thanks.
In my opinion, one should put more money than current expenses. This is not only for unforeseen expenses but also for enjoy the post retirement life well. Everybody deserve it.
Agree. Thanks.
Bottom line. if I want to retire for 50 years, assuming 1,00,000/- as monthly expense and 7.2% inflation and returns after tax of 6.5% from my corpus, how much corpus would I need? I have done the maths but wanted to double check. can someone pls answer?
7.08 Crores. Calculated using: Four Simple Retirement Planning Tools