How to Estimate Future Lifestyle Expenses
Most of us have serious blind spots when it comes to honestly estimating future living expenses. Trying to forecast lifestyle costs for two or three decades into the future is nearly impossible when we don’t have a realistic view of our current expenses.
With hundreds of observations as a guide, I have a good sense of where the problem begins. Most people are reasonably good at estimating ordinary expenses that occur each month. The difficulty starts with the extraordinary expenses that come about irregularly. It’s easy to think these costs will simply vanish in the future, but alas that’s unlikely.
One key is to realize that extraordinary expenses may not be easily predictable but they are “ordinary.” That is, they are part of your overall lifestyle expenses when you step back and take a broad view. Budgeting, (I promise not to use that word again), tends to focus on the narrow and repeatable costs like the electricity bill or mortgage payment. But taking a vacation or putting new tires on your car are also part of your lifestyle expenses although they don’t happen every month.
The reality is extraordinary expenses appear somewhat randomly but tend to dot the landscape when you look at expenses for timeframes longer than a single month.
PLANNING FOR RETIREMENT? – START HERE
A few years ago, we visited with a couple in their late 50’s who were referred here for retirement planning. We scheduled a Preview Meeting to openly discuss their current financial situation and what they wanted to accomplish in the future.
It was clear early on that the husband had very little interest in the financial planning process. In his mind, they had enough financial resources to sustain them throughout retirement. His wife had legitimate concerns and was the driving force for seeking independent financial planning expertise. As we were ending the meeting I asked them to take a look at The Gap whiteboard that we have in our conference room.
The starting point for The Gap exercise is your current annual lifestyle expenses. I asked them what their current annual expenses were so that we could do a back of the envelope calculation of retirement readiness. The husband blurted out $100,000 and the wife said $400,000. Quite a different starting place!
We didn’t end up working with this couple in large part because of their unwillingness to connect honestly with their existing financial circumstances. While their example may be extreme, it’s not unusual for couples to have far different versions of current reality and what matters most. Are you and your spouse on the same page financially? Do you ever talk about what you want your financial future to look like?
Your present living expenses provide a mirror into the future. There indeed may be differences between today and tomorrow but it’s the best guide available. Start there. Ready for a real conversation?