Friday, February 7, 2014

Do Expenses Drop by 30% in Retirement?

The old rule of thumb was that you would spend 30% less in retirement than when working (1). This was called the "70% Rule".  Lately, financial planners started to doubt this rule.  What are our experiences so far?



Expense
Fixed or Variable
Change per Month
Comments
Eating Out
V
+ $200
More time to eat out with spouse.  No drop in lunch expense as I used to brown bag to work.
Work Clothing
V
- $200
Less dry cleaning, less to purchase
Communications
F
+ $65
Company used to pay for cellphone
Entertainment
V
+ $200
More time to see shows, concerts
Automobiles
F
- $700
Need one less car




Net Change

- $435


Fixed implies the expense cannot be easily changed month to month.

So the reduction in expenses is pretty small, single digit percentage points depending on your starting point.  The biggest change is driven by fixed auto expenses.  Your experience may vary.

I am planning on no change in our expenses in retirement, particularly for the first 10-15 years.

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(1) Setting a new retirement income target, Financial Post, July 23, 2013.

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