As we saw in the first part of the article ‘Tips to save money during retirement’ how a retiree can save money. Why to reach a stage where you are constantly cutting corners to save penny even during retirement. As someone rightly said, “Retirement is not the end of the road but the beginning of the open highway”. Retirement is when you want to enjoy the carefree life once all your responsibilities are over. To make sure you enjoy care free retirement I always advice individuals to take into consideration the approach of Expense Replacement.
Expense replacement – means your investment should earn that much amount which helps you in taking care of all your expenses and live a comfortable life. For this you must take into consideration all the expenses which will continue even post retirement.
While calculating expenses break your expenses into three main categories –
1 – Fixed Mandatory Expenses which are to be borne earning or no earnings and remain constant. Some of the examples of fixed mandatory expenses are –
- EMIs of all your loans, be it car, house, business or second home
- Insurance payments
- Maintenance bill of the property
- School/College fees
Remember to review these expenses regularly as the above heads change in case of changes in say selling your car or shifted to own house then stoppage of rent or no more school or college fees.
2 – Mandatory variable expenses – are all the expenses which are mandatory but the amount fluctuate every month –
- Gas bill
- Electricity Bill
- Phone bill
- Water bill
- Grocery bill
- Personal care
- Petrol/travel expense
- Credit Card bills
- Others (include irregular expense but which are mandatory to incur like doctor bill, breakage in the house, if you are a pet owner then grooming, Vet expenses and others.)
3 – Variable expenses – are expenses which are not fixed or mandatory but people still incur (and off lately these have become like mandatory expenses more than non-mandatory) like –
- Coffee shop
And others. The component of variable expense increases post retirement as that’s when you would travel the world, meet friends for coffee or enjoy a meal at ease. Maybe clothes, gym may come down but other expenses go up.
Note – although expenses like children school fees, taxes, petrol and maintenance of car and other expenses may reduce but at the same time expenses like medicals and other variable expenses can increase. Make sure to maintain an expense sheet on daily basis as it will help you plan all your goals which definitely includes your ‘Retirement Planning’. Your ‘Expense Sheet’ should include smallest of the expenses and do not forget to factor in expense of the bucket list in your retirement planning which you would like to fulfill.
Always factor in expenses on the higher side.
Make a list of all the expenses and keep it ready as next part we will understand how to calculate the amount you will require to survive post retirement.