What Expenditure is Essential?

In its recent Retirement Income Advice Review, the FCA referred on several occasions to “essential expenditure”; for a long time, we’ve used the same term, and our experience has taught us that it’s quite hard to pin down – after all, an item which is essential for one person might be discretionary for another. There is, of course, a discretionary element to retirement itself – I’ve often heard the comment “I won’t retire, unless I can afford to…”

Some items, which seem essential, have a discretionary element to them – we all have to eat, yet we may choose premium quality products (Waitrose or Asda?); and the same goes for clothing, as well as many other items.

Essential and discretionary expenditure can change over time too – some things which we consider to be essential nowadays would have been luxuries some years ago.

Technology has driven many of these changes. For example, since the 1990s, the rise of digital technology has introduced additional expenses which have become essential. There are few people who would consider connection to the internet at home to be anything other than essential nowadays, and back in the 1990s, those who were lucky enough to have mobile phones would have felt able to do without them. One item that is often missed by our clients is the need to replace and update hardware – in our household, at least, our laptops, ipads and mobile devices need updating and replacing every few years.

Technology has removed certain items from the list of essential expenditure. An expenditure questionnaire from thirty years ago would have included newspapers and books in the essential expenditure items. The availability of online news and the ability to stream books may have moved both into the “discretionary” column of the spreadsheet. I suspect that a landline for your phone will soon become a discretionary item, if it isn’t already.

Health related items have also changed. Today’s retirees face potential costs for private healthcare; many retirees are now opting to pay for private treatment (or private medical insurance), whilst meeting the cost of glasses, hearing aids and dentistry. Preventative healthcare, such as sports massages and osteopathy, would be considered by many of today’s retirees to be an essential item in their budget. Is gym membership an essential part of our preventative healthcare costs? Over the last thirty years, a succession of different governments has failed to come up with a plan to pay for care in later life; whilst changes are scheduled to be introduced in 2025, it will be a surprise if they do become law. As a result, retirees are obliged to make financial plans to cover a potentially huge additional cost in later life.

Some changes have been more mundane. It’s become increasingly common to have to pay for on-street parking, and I suspect that we will see a lot more change in transportation costs over the next thirty years. My own personal situation has changed – my electric car means that my cost of fuel and oil have been replaced with a larger electricity bill (this has also reduced the amount of money spent on chocolate at service stations!).

It’s not just society which drives changes in the make up of our personal expenditure. Age can mean that we have to employ others to do things that we may have done ourselves when we were younger – many of our clients employ gardeners, and, once you get to a certain age, climbing a ladder to clear a gutter or paint a window may be tasks we no longer want to do ourselves. Many retirees help grandchildren with the cost of education (and associated costs, like rent) and, thankfully, this cost does not continue indefinitely.

The future may bring other changes to our patterns of expenditure – will self-driving cars mean that fewer people give up the car in late retirement?  Will climate change mean that air conditioning becomes an essential item?

We know that flexibility is an important part of every retirement plan. Given the changes to essential expenditure in the last thirty years, it would be foolish to imagine that the list of essential expenditure items for today’s retirees will not change when they stop work. What is essential is to keep your expenditure under review and to work out how best to finance the essential and discretionary items. If you would like us to help you analyse your expenditure, please contact us.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner


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