• Darryl Rosen

Are You Being Real About Expenses?

The fact that many future retirees proclaim that their living expenses will be lower in retirement is an interesting phenomenon to me. They talk about fewer dry cleaning bills, less wear and tear on their vehicles because they won’t have to drive to and from work.

But they ignore the “new” expenses that might come their way. (Especially health care costs as you age!)It’s not just the normal stuff, but the unforeseen expenses that can ruin retirement. Typically, retirees’ new spending patterns could include the following:

  1. Travel

  2. New hobbies

  3. Doting on grandchildren!

Traveling to exotic destinations, maybe even with your family in tow, are wonderful ways to spend your retirement years. But these activities are optional. What about stuff that’s beyond your control? If you live in Illinois, you may pay high property taxes that rise year after year because of state budget problems. What about your home? You may finally be free of a mortgage, but you’re likely to incur higher home maintenance costs. The older your property, the more likely you’ll have to have the local repairmen on speed dial.

I often wonder how come people don’t get real about expenses? My experience is that it’s easier to sweep this subject under the nearest rug. Rate of return and asset diversification are not emotional topics. But, living life comfortably (on your terms) is a topic loaded with emotion, and I find it’s more difficult to consider. But the issue still exists: Do expenses really go down during retirement?

Here is my professional answer: Maybe!

Whatever the case, you’ll be better off using a higher expense figure in your retirement calculations, rather than the lower numbers that might look better on the calculator. Using a more conservative figure will provide more flexibility in later years because you’ll spend less of your nest egg. You may not live life exactly in a manner that pleases you, but the downside of outliving your money will be much less likely.

The truth is that expenses may change in retirement, but it’s less accurate to suggest that they will be lower.

Future retirees who do a thorough analysis about retirement expenses are more informed and more likely to spend accordingly. Many have a goal of spending less money in retirement, but studies suggest that this is not the case. One study (McKinsey) reported that 32% of retirees expected to reduce their expenses, yet only 10% did.

J.P. Morgan also found the following:

“For lower-income households, there’s less ability to reduce spending, since a larger percentage of their income is going to essentials,” says Katherine Roy, chief retirement strategist at J.P. Morgan, who led the study by her bank. “Wealthier households have more discretionary income, so it’s easier to trim in retirement.”

I’d like to share a final thought with you. My purpose isn’t to scare you and cause you to go live in a hole somewhere where your credit cards don’t work. I don’t even want my boys (and Jill) to go somewhere where my credit cards don’t work.

But there are many elements that go into a comprehensive retirement plan. Level of savings, assumed rates of return, years to retirement, etc. I feel that people are too casual when it comes to this part of their plan. I think it’s because many don’t want to confront the possibility that they may not live out their years in a manner that’s consistent or preferable to them.

That’s just the way it works.

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