Will My Expenses Grow After I Retire?

This Little Graphic Suggests You Will Need Many More Quarters as You Move To The Right
This Little Graphic Suggests You Will Need Many More Quarters as You Move To The Right
This Little Graphic Suggests You Will Need Many More Quarters as You Move To The Right

I enjoy watching The Suze Orman Show on Saturday nights. Only, probably not for the reasons you’d expect. You see, I like getting into staring contests with Suze—I’ve yet to win. I also try to interpret her facial expressions while she listens to callers; she’s like a living Rorschach test. The thing about Suze (first-name basis, her and I) is that she’s a lot like Jim Cramer on CNBC, they’re both very telegenic and personable, but both give advice I almost entirely disagree with.

Jim Cramer is great to watch because nobody can get CEO interviews like Cramer, and nobody like Suze can display for the masses some of her viewer’s truly tragic states of financial bedlam. Her “Can I Afford It” and “How Am I Doing” segments are good proxies for how overheated or how cautious the economy is: “Suze, I’m 64 years old and am looking to start saving for retirement. I was wondering if you think I can lease a Maybach?” was probably a common call in 1999 or 2007—my records don’t go back that far, so I’m only assuming…

Anyway, months ago I was watching Suze and during her “How Am I Doing” segment she advised the caller about her retirement. It went something like this, (cue frantic-sounding voice) “Girlfriend, you’re in your late forties and your expenses are already more than your income. You haven’t even hit higher life insurance premiums! Health care spending! Medicare supplemental premiums! And why do you have burial insurance for an elderly person in your 40s?? Pay off your other premiums! Think assisted living in Boynton Beach in 30 years from now. I think I’m having an aneurism! Long-term care insurance! And, your children are about to head to college! Are you kidding me, girlfriend?!”

It went something like that. Suze believed that the caller’s expenses were almost sure to go up, for both these reasons as well as good ol’ inflation. Ah yes, inflation. Unless you live in Japan, inflation is right up there with death and taxes in the “List of Things You Can Guarantee” category. Whenever anyone looks at the future, he or she will undeniably project 2-3% inflation into every expense or income number they see. In fact, the backbone of the “4% Safe Withdrawal Rule (SWR)” is that your basic 60/40 portfolio will rise about 8% per year (including dividends); you back out 3% for inflation to yield a 5% real return, withdraw 4% to live on, and leave 1%  for buffer.

There’s some logic to this. A 12 oz. can of OJ concentrate has risen 1.9% per year over the last 25 years. Prices have also risen over that time for a gallon of unleaded gas (3.1%), a loaf of bread (2.9%), a movie ticket (3.4%), a dozen eggs (2.4%), a whole chicken (2.2%), a median house (4.2%–darn housing bubble) or a Kilowatt-hour of electricity (2.7%). As time goes on, the population increases, the money supply increases, outstanding credit increases, so prices tend to increase. However, I am going to make a contention. For those of a certain age, I think projecting 2-3% inflation into one’s future expenses is generally wrong.

If you’re in your mid forties, you should project 1% growth in your expenses over your lifetime.

Now, before you exit this browser tab and officially stop reading this blog, please, let me make my argument.

Obviously this doesn’t apply if you intend  for it not to apply. If you’re 45 and in five years you want to move to and rent a vineyard outside Rome, well, then obviously your expenses will probably outpace inflation. However, I believe this applies if you intend to keep your approximate current lifestyle while also accounting for all the expectations of higher costs incurred through age (namely, healthcare).

How is this possible? Well, here we go…

Your total cash outlays for expenses are made up of two basic factors—your allocation of expenses across various categories (15% on food, 10% on transportation, etc.) and the level of those expenses (cost of food, cost of transportation, etc.). So I’m going to refer you to the below chart, courtesy of JP Morgan Asset Management’s 2014 Guide to Retirement.

Your Age Grows. Your Expenses Don't.
Your Age Grows. Your Expenses Don’t.

 Ah yes, take it all in. What do you see here? Here’s what I see. I see my expenses falling into one of three categories:

Pace Inflation

  • Food – I don’t expect to be eating significantly more as I age. In fact, I expect that I’ll want to eat smarter/less. But I’ll assume my food preferences will stay about the same.
  • Other/Miscelleneous – I posited to my wife that we go “sans toilet paper” in retirement. She did not agree; thus, these types of costs will pace inflation.
  • Charity – I would hope that I can give more as I age, but on the aggregate these expenses seem to pace inflation over time.

Exceed Inflation

  • Health Care – The Bureau of Labor and Statistics gives inflation rates by expense category. So, not only will you likely consume more health care services (higher insurance premiums, more drugs, more care, possibility of home care services in future, visit homecaring.com.au for more info), but inflation in the health care category is also among the highest among the various categories.
How Inflation Stacks Up By Expense Category
How Inflation Stacks Up By Expense Category

Trail Inflation

  • Education – Kids will graduate and your own personal/professional development will cease/decrease as you get older.
  • Apparel – I stopped growing when I was about 19.
  • Housing/Mortgage – Here’s the biggie. Your mortgage payment today is as high as it will ever be. Through refinancing and eventual payoff, this expense will become easier to pay each year into perpetuity. Also, as kids grow up and we age, the household size decreases, thus the amount of home that is needed goes down as well, decreasing utilities/HOA Fees/property tax, etc.
  • Travel/Entertainment – This is a small line item overall, so little effect. However, as we get older we tend to travel more, but we travel much slower and cheaper.

On the whole, you can see where I’m going with this. What you pay for certain items will almost always go up over time. However, how much you buy of certain items will also decrease over time. As displayed by that first chart, the decrease in tastes/lifestyle/quantity as you age will outweigh the marginal increase in price brought on by inflation.

Let’s take the midpoint of the above, assuming I’m your average 50-year-old and inflation runs at 2.5% per year.

Real Expenses when I’m 50 (now): $56,781

Real Expenses when I’m 60 (in 2024): $65,390 1.4% Net Annual Growth

Real Expenses when I’m 70 (in 2034): $73,550 1.3% Net Annual Growth

Real Expenses when I’m 75 (in 2039): $61,741 0.3% Net Annual Growth

So, if I’m projecting expenses over my lifetime, and I’m in my mid-forties (my peak spending years), you can see that I can realistically put in a growth factor over somewhere between 0.0 and 1.5% in my estimates to get a reliable future expense amount.

I understand that the reaction to this will probably be something like, “Ok, so what? I’ll keep projecting my expenses to track inflation—about 3%–just to play it safe. If it comes in lower, then that’s just gravy.”

That attitude is fine, but understand that playing it safe has its own risks. Projecting expenses at 3% versus 1.5% is the equivalent using a 4% SWR versus a 5.5% SWR. This would mean your nestegg would have to be 37.5% higher using a 4% SWR than when using a 5.5% SWR. How many more years would you have to work to get your nestegg to this level? How many of little Junior’s ballet recitals would you have to miss?

Bringing this back to Suze Orman. The reason I disagree with much of what she says is because her solution to nearly every problem is “work longer,” and she talks about “years of retirement” as a risk, like they’re some pesky “years left before you can finally die.” I’m not sure she’s ever recommend somebody start taking social security at 62. She errs on the side of caution without fail, without ever talking about the risks and losses in waiting to retire, holding out, saving up more—this attitude needs to change, girlfriend.

Much Love,

Mr. 29

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