Make Sure Your Retirement Plan Properly Funds Your “Lumpy Expenses”
While most retirement plans anticipate smooth, constant-dollar spending from year to year throughout retirement, most of us just don’t spend that way. Our actual expenses in retirement can vary significantly from year to year and therefore, the pattern of our future expenses may be “lumpier” than expected by our plan. Not only is it likely that we will incur unexpected expenses but it is also likely that some of our expected expenses won’t be incurred every year. As we said in our post of February 7, 2019, if you aren’t separately budgeting for these non-recurring lumpy expenses, you probably don’t have a robust retirement spending budget (or plan).
Inspiration for today’s post was an article in USA Today entitled “Longer Lives and lumpy expenses force Americans to rethink their retirement-savings math.” There were several key planning take-aways in this article with which we agree:
- You should do the math based on your financial situation and goals
- You should plan for unexpected expenses
- You should plan to live longer than your life expectancy
On the other hand, we don’t necessarily agree with the article recommendation that retirees must simply build a surplus into their plan to cover unexpected expenses. We also believe it is important for retirees to properly consider their future expected non-recurring expenses, so that their plan does not over-fund for these expenses. For example, if your mortgage will be paid off in five years or you don’t plan on traveling after age 80, you needn’t fund for these expenses over your entire lifetime planning period.
If you are developing your spending budget using a Strategic Withdrawal Plan (SWP) or your financial advisor uses a Monte Carlo model, it is likely that you aren’t properly funding for your expected or unexpected non-recurring expenses. If so, we suggest that you try out the Actuarial Budget Calculators in this website and investigate our new “Asset Reserves by Expense Type” tab.
