How I drive my wife nuts so we can spend more.

Retirement is all about resting, relaxing and enjoying, which is why you should care about your core expenses.  Core costs are those mandatory month-in and month-out expense that you must pay to live, e.g. property tax, food, utilities, insurance, healthcare, etc.  Discretionary expenses, on the other hand, are costs you can manage and reduce, either over the short or long term if necessary.   Typical discretionary expenses in include recreational costs (golfing), eating out, travel, charity, and personal care.

Core expenses in retirement (according to recent research) will continue to grow with inflation as it is what you need to live, while discretionary expenses (the “fun” expenses) tend to increase at first, peak and then decline in retirement as you age.

So, to maximize your fun in retirement and reduce your exposure to inflation, and at the same time help your retirement nest egg last longer, you should seek to reduce your core expense as you head into retirement.  And by doing so, as a bonus, you may be able to increase your discretionary (“fun”) expenditures.

Looking at it another way (and this is where I drive my wife nuts), let’s figure out how much money you need in your retirement portfolio to pay core expenses, for example, property taxes.  In my case, I pay about $8k a year in property tax each year.  Now, if I pay $8k a year (ignoring any increases) for 30 years and I use a relatively conservative 3.5% annual retirement portfolio withdrawal rate, I would need to have $228k in my portfolio when I retire just to fund my future property tax.  Wow, that is almost what my house is worth.

Now, alternatively, if my wife and I decide to downsize to a small ranch with a beautiful view and a lower property tax bill.  Let’s say half or $4k; we just freed up $114k which we can now use immediately or over time to have fun.  Yea!

So, as you think about retirement, cut your core expenses and enjoy!