How to Work out Your Retirement Expenditure

Addition, Subtraction or Both?

I was asked at the weekend to give my number one retirement planning tip. The person asking the question was taken aback by my answer. “I thought you were going to tell me to put as much money as possible into my pension or ISA or something. That’s what my pension company says I should do.”

It’s very easy to become distracted by the detail and technicalities of pensions, investments and tax, and it’s pretty common to forget the basics when planning your retirement. The purpose of retirement planning is to build up enough resources before you stop work to cover your expenditure after you have stopped work. Yet, I meet many financially literate people who may have even managed to navigate the complexities of pension tax rules, but have no idea of what their household expenditure is. And if you don’t know what your target is, it’s going to be pretty hard to hit it!

My answer to the question, incidentally, was “Work out how much you expect to spend in retirement”. I wasn’t particularly surprised to hear the follow up question “How do I do that? I’ve no idea what we spend now”.

If you feel the same, don’t panic, you’re not alone! And nobody actually knows exactly what they will spend in the years to come; we’re all guessing to a greater or lesser extent. However, the less guesswork is involved, the better.

It is essential to have a good estimate of what you are likely to need to spend in retirement. That will give you a target to aim at, and a much clearer idea of what you need to save, in order to be able to afford to retire.

When thinking about their expenditure, our clients can be split into two broad categories, when they first meet us:

  • Spreadsheet Analysts. Every piece of expenditure is itemised on a spreadsheet and carefully analysed, usually monthly.
  • Fatalists. This group keep their fingers crossed and hope that they spend less than their income. Generally, it’s always worked out for them so far!

You would imagine that the first group would have a better understanding of their spending, and their retirement target, than the second, but that isn’t always the case. One comment we regularly hear from the analytical group is “I can never quite reconcile the spreadsheet” – usually meaning that there are some items of expenditure that just don’t make it on to the spreadsheet. Our experience is that these are often the items that bring us the most joy – I’ll confess that not all of the spending associated with my cycling habit makes it on to the Wise family spreadsheet!

Surprisingly, both the analysts and the fatalists can learn from each other. And it is from years of listening to our clients that we have learnt that it’s best to use two methods to work out what you are spending now (so that you can estimate what you might spend when you stop work). One is based on addition and the other on subtraction.

The addition method is the most commonly used and follows what most of the spreadsheet analysts do – start with a list of expenditure items, then carefully populate your spreadsheet with the amounts you spend on each of those items. There are a few issues with this approach – the main one being that not every item makes it onto the spreadsheet!

The subtraction method is useful, and is what many fatalists intuitively use. Start with your income for the year, take off what you have spent and hope that the calculation gives you a positive number! You can also start by working out whether your savings balances have gone up or down during the year. Whilst this approach is much less scientific or detailed, it does have the benefit of including all items of expenditure.

Our view is that a combination of the two approaches makes the most sense. Start with the addition method, then use the subtraction method to sense check the addition spreadsheet, and, as a result, add in some additional expenditure items. You can even include a “frivolous spending” line in your spreadsheet (although I would still insist that getting yet more lightweight carbon components for my summer bike is anything but frivolous).

We would add that you should also get your calculations checked by someone who has done this a lot of times and is qualified to help (a financial planner, in other words). Even with a combination of the two methods, it’s still possible to miss expenditure items – in particular, some items don’t come up very often (e.g. painting the house) whilst others might form part of an employment package (e.g. health insurance).

What we do know is that there is no point in becoming an expert on pension taxation or understanding the differences between active and passive funds, if you don’t know how much you are likely to spend when you stop work.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner


This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up and you may get back less than you invest.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

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