Predicting Retirement Expenses (Part 2 of 3 in the Retirement Series)

The rule of thumb when it comes to retirement savings is to replace 80% of your pre-retirement income for your golden years. Popular personal finance author Rose Fres Fausto also simplifies calculating retirement expenses into "annual expenses x number of years before you go to heaven." 

While it is true that your expenses will decrease to some extent in retirement, you will also find that you'll be spending extra on other items as well, so the 80% rule might not be accurate in all cases. On the other hand, although Rose Fausto's computation seems a bit cheeky, it pretty much encapsulates how retirement planning should be approached. If you spend x amount every year and intend to live 30 years after retiring from employment, then you should multiply your annual expenses by 30. Easy-peasy. Of course, this is very much simplified as it does not take inflation into account and seems to imply that that is all you will need. So again, approach with caution.

For my RFP case study, I projected a retirement budget based on my clients' current monthly expenses, tweaking and adjusting accordingly to account for the changes their lifestyles will undergo in retirement.

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One of the first things that disappear in retirement are the work related expenses, such as gasoline, office clothes, toll, parking fees, lunch etc. My clients spend about Php12,000 per month on gasoline, so we can assume that when they retire, they won't be using their car as much and their gasoline expenses will go down dramatically, say by about 50%, thus the new gasoline budget of Php6,000 from the original Php12,000. I also removed the Php6,000 allotted as their allowance/ wallet money since that was supposed to answer for their daily needs while working (i.e. lunch, toll, parking fees etc).

Home and car mortgage payments as well as insurance premiums, should ideally be fully paid off by the time they step into retirement. Same with their kids' education related expenses, because by then, their two sons would have finished with school and will no longer be financially dependent on their parents.

Their travel expenses will increase though since they see themselves traveling more often in their retirement. With the husband's benefits as an employee in the airline industry, they will only have to spend on their lodging and pocket money since they can get their airline tickets for free or at a huge discount. Hence the monthly budget of Php20,000.

Health expenses will also increase because most HMOs do not include senior citizens in their coverage. The good news is that Philhealth coverage is mandatory for all senior citizens, but the bad news is that it's not enough, thus the need to have a healthy buffer to make up for what Philhealth won't subsidize. I allotted Php20,000 per month for their health expenses but if they have enough savings (i.e. their emergency fund), they don't even need to set aside money every month for this and can just withdraw from their savings when the need arises.

By tweaking the expenses to account for their projected retirement expenses, their current monthly expenses of Php154,374 have been reduced to Php92,221 or 59.74% of their current monthly expenses. Assuming that their kids are already fully grown and they can retire right this very minute, they will need Php1,106,652 per year for their living expenses and Php33,199,560 to support them throughout thirty years of retirement.

This is just a very rough estimate though since inflation* still has to be factored in and while Php33M seems like a jaw dropping amount (and it is!), it's actually very possible to have that sort of buffer during your retirement if you act early enough. And my clients don't even need to have the entire Php33M on hand right when they retire because there are ways and means to grow their money safely throughout their retirement.

For the last installment of this series, I will talk about how to create a retirement fund. Do stay tuned for that!

* There are all sorts of retirement calculators that factor in inflation if you want a more accurate figure. Google is your friend.
** Caveat: I am not a finance professional, so this post and the figures quoted therein should only be treated as illustrations on how to create a retirement plan. If you have suggestions on how I can improve my retirement plan, then I would love to hear about them in the comments section.


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