Retirement planning pitfalls: Our monthly expenses are higher than our estimates!

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: April 9, 2024 at 6:00 am

Last Updated on July 4, 2024 at 10:07 am

One of the common retirement planning mistakes is to underestimate monthly expenses. If someone asks me about my monthly expenses, I list the usual big-ticket items, like groceries, vegetables, petrol, medicines, etc.

If pushed a little harder, I recognise that it is better to consider annual expenses and compute an “average monthly expense.” The most common annual expenses are health insurance premiums (which get bigger and bigger with age and lack of insurer profits!), vehicle insurance premiums, annual holidays, etc.

This is a much better estimate but is still far removed from reality. More and more of our lives are controlled by technology and gadgets. Today, we cannot survive without the internet, laptops, and mobile phones. These, along with older-gen appliances like TVs, washing machines, geysers, etc., break down occasionally.

Every year, we would replace at least one of these, sometimes two of these. And each time we buy, we may be forced to buy an “upgrade”, costing more and breaking down more often.  These expenses are often not included in the average monthly expense estimate.

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We assume these are occasional expenses, but at the rate we use gadgets, they are more of an annual affair. How do we manage these expenses?

No, the answer is not the emergency fund. That cannot handle recurring expenses. Before retirement, we could manage because our source of income is usually greater than our expenses.

What about after retirement? If we dip into the corpus each time a gadget breaks down, our corpus may deplete faster than expected.

Ideally, those with a lot of time to retire should account for at least one gadget/appliance change each year and suitably increase annual expenses while computing the retirement corpus and investment needed to achieve this corpus.

But is this practical? Even without accounting for such expenses, a retirement plan is quite scary. And most investors are disillusioned. Is there an alternative?

There is, but it should be viewed as a supplement or a complement to a robust retirement corpus (which, when built over decades before retirement, is our best defence) and not as an alternative.

To address this, we shall ask, how can I ensure my income is always greater than my expenses all my life?  Before retirement, our employees will take care of this. After retirement, it would be great to have a source of active and passive income to handle big-ticket expenses. This is the best insurance (in addition to a large corpus).

Rent and dividends are the most common supplemental income for retirees (a pension or annuity is usually part of primary income). However, these also require capital to set up initially.

Individuals can leverage their skills and gradually set up a platform to earn active and passive income after retirement. This will strongly support the corpus (which should be planned for without depending on this income) and take care of gadget replacement nicely.

It is difficult and could take 5-10 years to get going. This is why retirees should plan for this well in advance. The most important benefit is that retirees would be using their time productively. They would still feel useful, and it can also positively impact their health.

The following resources can help you get started: