Many assume that their expenses will decrease after retirement and that they do not need as large a corpus as computed using our current lifestyle. This is a mistake.
A 35-year-old once told me, “My expenses will be lower when I turn 60 because I will travel less, eat out less, etc.” There could be several unexpected expenses between now and then, and health is only one. When we cannot say that next month’s expenses will be the same as this month’s, how can one assume that expenses will decrease after 25 years?
While planning for retirement, current expenses are one of the first inputs. Except for expenses associated with parents (who are unlikely to be alive when we retire), children (who are likely to be independent then), and loans (which we can assume to be closed, all other expenses should be accounted for.
It is also important to account for annual expenses like car and health insurance. Health insurance, in particular, can be expected to be steep at that time. In addition, I would also recommend a small buffer to manage sudden lifestyle changes.
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. Otherwise, this could happen: Why I had to postpone my plan for early retirement.
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Each year, the current expenses must reflect actual expenses minus expenses/liabilities that will not persist in retirement. This exercise must be repeated once a year before and after retirement. Yes, retirees need retirement calculators, too! This is why our robo advisory tool has extensive retirement bucket calculations (recommendations + a DIY tool).
This will only take a few minutes of your time, and there will be no speculation associated with current expenses. The transition into retirement would be seamless.
This method ensures lifestyle creep is accounted for smoothly. You are so used to the gadgets 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 for good reasons, like more travel, or bad reasons, like recurring medical expenses. An annual review should also alert you to such developments.
Do not assume your current day-to-day expenses will decrease upon retirement. Instead, only eliminate all expenses unlikely to persist in retirement using a retirement calculator. Renew inputs each year. Rinse and repeat.