A crucial aspect of retirement planning is drafting a retirement budget to get an idea of how much income you need to support your lifestyle. If you don’t get it right, you may find yourself spending more than planned, and that can lead to stress. Some people do a “back of the envelope” calculation of retirement income sources and expenses, but most people don’t take into consideration these frequently missed, wealth eroding factors:
- Increases in the cost of living (Inflation) – This is simply the increase in the cost of the stuff you buy. For instance, the price of a stamp in 1973 was 10 cents – soon, that same stamp will cost you 50 cents! Most projections use the Consumer Price Index (CPI) as the measure of how much the cost of goods and services go up every year, and historically, the inflation rate has averaged around 4%. This means that, if you spend $100 on goods today, plan on spending $104 in one year for the same goods
- Technological change – Not only does the cost of goods and services go up every year, most people also don’t consider the price of things that were not even available before. The result is more spending than traditional budgeting considers. Plan on spending 2 to 3% of total income per year on new things, like IPhones, IPads, digital cameras GPS devices and Keurig Coffee Makers.
- Planned obsolescence – Not only are prices going up on things you own and you are buying stuff that did not exist before, all the stuff you buy wears out over time! Companies plan on product life cycles when doing sales calculations. For instance, cars wear out, roofs, furnaces, phones, and televisions need to be replaced. Software needs to be upgraded, and clothing goes in and out of style. A rule of thumb is to consider replacing your car every 5 years and spending 2% of the value of your home every year just on maintenance. Plan on an additional 3 to 5% of income per year to replace the stuff you already own.
Perhaps the best way to reduce retirement expenses is to simplify. If you own less stuff, perhaps, you don’t need as big a house. Also, you have less stuff to replace when it breaks, and technological change won’s dent your budget as much if you don’t need to buy the latest gadget. You will also have less stuff to worry about!
So there you have it. Stuff goes up in price, you have to buy new stuff, and stuff wears out. Once you have a budget, add 8 to 10% to the bottom line to take into consideration inflation, technological change, and planned obsolescence. You will have a much greater chance of having an accurate budget, which means you have to spend less time worrying about money. And don’t forget a budget line item for taxes (a subject for another blog post). Please feel free to call or email me with any budgeting questions you might have. And for a laugh, check out this video with George Carlin’s take on “stuff” (contains a tiny bit of swearing).
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