By: Andrew Rosen, CFP®, CEP®

If you’ve read any of my blogs over the past couple of years, you’d know how I feel about understanding one’s expenses. In order to financially thrive, it doesn’t matter how much money a client has, or the amount of income they earn. If there is no idea how much it costs to be them or run their household, financial success will prove difficult.

One of the most common questions asked of me (or my partners) is “how much money do I need to retire?” Sounds like a relatively easy and innocuous question… on the surface.

However, the roots of the question run deep into a person’s financial soul. What they are really asking is “how much money do I need to keep my same standard of living, while no longer earning a paycheck?” It’s akin to asking an architect how much it would cost to build your dream-house. There is no one-size-fits-all answer to either of these questions. It depends on what kind of lifestyle you lead today and/or what kind of house you want built.

Sounds easy, right?

Go back and look at your expenses. Tell me what you spent last month, last quarter, and last year. Before we move on (and I would love to end this article here), let me tell you what actually happens a fair majority of the time with clients when looking at expenses.

Client: Andrew, we looked at our expenses. After taxes, we spend $6,000 a month.

Me: Great. Do you feel comfortable with your answer?

Client: Absolutely!

Me: Fair enough. May I ask you a question?

Client: Sure, what?

Me: I see here that you and your wife bring in after taxes, medical insurances, and 401(k) contributions a total of $10,000 a month.

Client: That’s right. We are very proud of how hard we work.

Me: As you should be. Now, let me ask you how much money from your take home pay do you think you could afford to save? This will allow me to figure out what I have to work with to make your dreams come true.

Client: My wife and I talked about it. We feel comfortable with something in the $300-$500 range.

Me: Wait a minute, I’m confused. You are telling me that’s all you can save?

Client: Yes. Why?

Me: You see, by my rough calculations you spend $6,000 a month and make $10,000 a month. I assume this means there is $4,000 a month to work with?

Client: Well… we didn’t include a bunch of one-time expenses. We have $10,000 in vacations this year. My wife needs a new car and we want to do some home remodeling.

Me: What about next year? Or, last year? Did you have $4,000 to work with then or anticipate having it next year?

Client: Probably not.

Me: Then I’d say it’s closer to $9,500 a month to run your household.

Client: Oh… yea. I guess that’s so.

And… Scene!

The irregular regular expense.

You see what happened in my example? This is EXTREMELY common. Most discount or dismiss completely the irregular regular expenses. They chalk them up to one-time outflows. What they fail to realize is next year there will be more one-time expenses (albeit different).

This is the silent killer in financial planning. How can I give you an answer of what you’ll need to retire if we are missing over $40,000/yr of real expenses? Just because the categories are different each year doesn’t mean they aren’t real. All too often, we discount the irregular regular expense. This is a critical flaw as understanding what we spend is at the crux of being able to financial plan.

Test yourself.

I know what you’re thinking. How can someone fall into this trap? I never would. More people make this same mistake than don’t. It might be prudent to test yourself.

First: Ask yourself what you think it costs to be you monthly and annually? Then write that figure down.

Second: Look at what is deposited in your bank account each paycheck (and don’t forget that bonus check).

Third: Of the difference between what is coming in and going out, what are you currently saving?

Fourth: Do you feel confident you can save the entirety of that unaccounted figure? No, really?

There is your answer. If there is a difference between what you thought and what you are comfortable doing, you too suffer from irregular regular expenses syndrome.

Now what?

The fact one has irregular regular expenses in itself is not a bad thing. We all have them. This year I’ll go on more vacations than last year. I’ll do more house decorating this year, too. Next year we want to get a new car. You see, we all have them. The danger is not recognizing them and not crafting a financial plan that takes them into consideration. Once you get a grip on this, you are one step closer to being able to answer the question of how much money do you REALLY need to retire?

Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
Find out more about Kyle Hill, CFP®
Find out more about David Levy, CFP®

Financial planning and Investment advisory services offered through Diversified, LLC, a registered investment advisor. Securities offered through Securities Service Network, LLC, Member FINRASIPC .  Some associates of Diversified, LLC are registered representatives of Securities Service Network, LLC, a registered broker/dealer, 9729 Cogdill Road, Knoxville, TN 37932. (800) 264-5499.