If you (or your financial advisor) aren’t planning for non-recurring expenses in retirement, you probably don’t have a realistic retirement plan.
If you use a Strategic Withdrawal Approach (like the 4% Rule or its many variations) or your financial advisor uses a traditional Monte Carlo approach, your annual spending budget is usually expressed as a constant real dollar amount each year. Assuming constant real dollar spending for your entire period of retirement can either overstate or understate the assets you need to fund your retirement. This can occur because:
- Some non-recurring expenses (such as travel expenses, new cars, pre-Medicare healthcare premiums, home remodeling expenses) are primarily front-loaded during retirement, or
- Some non-recurring expenses (such as long-term care or bequest motives) are primarily back-loaded during retirement
If
you want to develop a more realistic financial plan during retirement
that reflects non-linear spending, we recommend you use a model like the
Actuarial Financial Planner (AFP). The AFP distinguishes between future
expected essential, discretionary, recurring and non-recurring
expenses. See our post of April 16, 2022 for more discussion of this
topic and our post of December 8, 2023 for discussion of steps you can
take if there are an insufficient number of cells in the AFP to perform
calculations of the present values of your non-recurring expenses (or
other present values).
