No. of Recommendations: 2
I, and others, often urge people, in thinking about what kind of returns they need, to start by estimating expenses. I think it would be useful to see how we think through expense categories, so I'll give a try, with running commentary. Because I feel I am living comfortably within my means and putting enough away, I really don't budget line by line, which would be important if I was looking for where to cut, and I have found, though it varies from year to year, I usually overestimate expenses by about 10%.

1) Federal and State Income Taxes
2) Social Security and Medicare Witholding

[I separate out these items and do not include them in retirement years' expense projections, instead adding on a Federal and State Income Tax projection based on likely taxable income at that time, which will be much below current income.]

3) Medical

[This includes share of premium, co-pays, and uncovered expenses. I expect this to go up, not just through inflation, after retirement.]

4) Long Term Car Insurance.

{Mine is inflation adjusted with a constant payment, i.e. I chose to pay more now and less later, so as a percent of expenses this will go down with inflation.]

5) Other insurance (home, car, life, disability).

[Disability will end with retirement, and we will go down to one car. However, in projections, I gloss both this and Long Term Care as inflating the same as other costs, figuring if I do the same with medical and other expenses, it will come out in the wash.]

6) Property Taxes.

[We paid off our mortgage about 10-years ago, so this is the slot where others would enter mortgage payments. In Michigan, as long as we stay put, property taxes can only increase with inflation, even if assessments exceed inflation. It is a law that is very helpful for those whose incomes do not go up as much as assessments. It has also killed the public schools.]

7) Big Ticket Items/Home Repair and Improvement.

[This varies a lot from year to year. I budget a new car as a two year's worth.]

8) Travel and Entertainment.

[This also varies from year to year. We don't eat out much, and cheaply when we do, except when travelling, so I don't have a separate budget category for that. Entertainment is for tickets, not home entertainment costs. I used to have a separate category for books and records, but I no longer buy many books, beyond some paid for stuff.]

9) Utilities (electric, water and sewage, gas, telephone, broadband, long distance, cable).

[There's nothing to watch on TV, but I did get to see Heddy Lamar doing a 1931 nude scene, a couple nights ago, which was actually slightly more revealing than a typical day on campus, even if not in technocolor, so I suppose the cable bill is worth it.]

10) Food, clothing, and incidentals.

[This is a very lazy category, and includes wine and beer, occasionally eating out, cash expenditures, gasoline, minor repairs, calling the plumber, computer accessories, etc. Basically, anything that goes on the credit card or gets paid in petty cash or by check that doesn't get its own category gets lumped into this one. I would guess about half actually goes for food and household supples, like toilet paper and cleanser.]

For retirement projections, I take this current buget, minus the income tax and social security component, then add income taxes and use different inflation estimates. I think this somewhat overestimates actual expenses (inflation adjusted) from these categories.

What this approach to retirement budget projections fails to account for is added life-style continuation expenses with age and any desired additions, such as more travel. I've said before that I think those who claim retirees will have lower expenses fail to consider the need to hire help to do chores younger people typically do themselves. My guesstimate is to hire people to do yard and housework we now do ourselves would cost almost as much as what I budget for big ticket items. Some kind of high quality cooking service would more than make up for savings of eating out less and eating less in general.]
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