It can be difficult to predict what your outgoings will be in the future. However, getting it wrong can be the difference between a happy and miserable retirement.
There are surprisingly few resources out there to help us calculate what we might spend and many of the budgeting calculators available miss essential items off the list of expenditure, particularly for retirees (they tend to be put together by people who are still working!).
The way in which we spend money, and the items we spend it on, had already been changing over the last few years and the Coronavirus pandemic has made it still more difficult to estimate future expenditure (as we’ve all been spending less on entertainment and holidays).
Our experience is that there are some common items that our clients tend to miss when trying to estimate what they will spend when they have stopped work:
- Home maintenance. Our homes will continue to need to be maintained, and as DIYers age, the number of tasks they can carry out tends to diminish. It’s important to budget for home maintenance and it can often be sensible to set aside funds for this purpose.
- IT replacement. The latest technology can date very quickly, as I discovered when I found an iPod in a drawer recently. And we shouldn’t assume that our phones, iPad and laptops will never go wrong. They aren’t cheap items to replace when they break and our computer hardware can quickly become dated (and very slow).
- Help at home. Similar to home maintenance, retirees find that there are some jobs around the house they don’t want to do any more. This seems to be particularly true in the garden! As retirement progresses, it’s not uncommon to pay for help in the garden and around the home. It’s obviously sensible to budget for this.
- Presents. It’s easy to underestimate the amounts we spend, and then to feel constrained once we have retired. It’s important to feel that you can still be generous once you have stopped working.
I could write an entire blog post about cars. Some of us might be happy to have one car from the day we stop work to the day we hand our licence back. Others might want to drive a different, new car every year. It’s essential to work out what you might spend on cars in retirement, and it’s rare for two people to come up with the same answer. There is, of course, no right answer to the question about how much you should spend on cars!
The items we buy and the places we buy them has been changing. Subscriptions have become a necessary item in the modern world – not just TV, but music subscription services have replaced physical ownership of CDs and vinyl in many homes. Parking permits have become a fairly common item of expenditure for those of us who live in cities and larger towns. Many of the expenditure analysis tools which we see don’t include these items, and this can result in important omissions from the budget.
The places where we buy things has also changed significantly in the last couple of decades. The increase in the range of products stocked in supermarkets can make for complicated budgeting. The weekly trip to the supermarket can result in us bringing home all sorts of extra items – such as books, IT equipment, clothes and televisions (not to mention the treats from the middle of LIDL!). The growth of the range of items stocked in supermarkets was quickly followed by the ability for us to buy anything online. Internet shopping does seem to make budgeting easier – it’s much easier to see what you bought and when.
One huge change, which has been very helpful for budgeting purposes, has been the move towards a cashless society. When I first became an adviser, one of the budgeting challenges was to work out where the cash that clients withdrew from the bank was actually spent. Nowadays, with cash becoming almost redundant, it’s much easier to see where the money is going.
If you own your own a business, it can be easy to underestimate your expenditure. Since the tax breaks for electric cars were introduced, it has become more common for clients to run their cars through their business. This can be great for tax, but it can make it more difficult to work out what your actual expenditure will be when you don’t have a business any more. And, of course, cars aren’t the only item of personal expenditure which the business might fund.
Budgeting will never be a perfect science. After all, it’s impossible to know what the future will bring. Some say that we will choose not to own cars in the future, switching to a subscription service for self-driving cars, and having everything delivered to our doors. I’m sure that there will be plenty more, unpredictable changes to our spending patterns.
Retirement will hopefully last a long time – and the longer it lasts, the harder it becomes to make predictions about it. But that doesn’t mean that we shouldn’t try our best. Thorough analysis of our anticipated expenditure is one of the most important parts of your retirement plan. We can help you to work out if you have been realistic and whether you have omitted anything important.
Philip Wise | firstname.lastname@example.org
Managing Director and Chartered Financial Planner