Are retirement expense myths ruining your financial plan?

Do you plan for your expenses to drop in retirement, for expenses to simply increase with inflation, and to be mortgage-free? Reality paints a very different picture!


Estimating expenses in retirement is easy, right? Take your current expenses, assume you’ll need about 80% of that in the first year, then increase that amount by inflation each year. Done! Or are we? This widely used approach provides the accuracy of a blindfolded drunk playing darts. So what’s wrong with it?

You will likely see your expenses initially increase. Half of pre-retirees expect expenses to decrease, but studies show that more than 2/3 of recent retirees see their income needs higher than before retirement! (Source) Long-awaited vacations, splurges on family, and the adoption of costly hobbies (I’m looking at you, golf) often contribute to this phenomenon.

Expenses in retirement do not increase in a straight line. After the initial increase, household expenses often decrease for a while, then increase again in later years due to health care and the need for additional assistance. Some expenses (like insurance, health care, and food) will likely increase faster than inflation. Others will decrease or disappear entirely. How can you expect a straight line to accurately represent this?

You may still have a mortgage. Twenty years ago, only 1 in 5 retirees still had a mortgage; however, that number has doubled since then. (Source) Refinancing, downsizing to a different house, or accessing home equity all contribute to the increasingly common “retirement mortgage”. Even if you have paid off the house, the portion of your mortgage payment set aside (escrow) for property taxes and insurance will still need to be paid out annually!

So how can you paint a more accurate picture of your future expenses?

  • Toss out the “rules of thumb”. They are easy to use, and most on-line calculators and even some financial planning software packages use them. Make a time investment in your future, crunch the numbers, and work with someone who uses a more sophisticated approach.
  • Know what expenses will likely increase or decrease. Make sure your plan accounts for these changes at the correct time.
  • Don’t expect to “set it and forget it”. By having an easy system to monitor your cash flow, you can make adjustments that can greatly extend the life of your lifetime savings!

Next week we’ll touch on 3 other expense myths that should be retired. Here’s a hint…you will see some of these expenses for the first time!

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