One very overlooked aspect of retirement planning is the things that cannot be planned for–one offs. I’ve written about the concept quite a few times because depending on events and luck, one offs could be ruinous…unless a generous cushion is built in to the plan.
Things in the one off category that I’ve brought up before have included veterinary bills, new tires, replacing the roof, an unexpected dental event and there are of course others. Add to the list refrigerators as our appears to be crapping out on us. Fortunately we don’t need a big fridge–actually a big one won’t fit through our front door–but this will be somewhere between $1000 and $1200 depending on the various sales prices that all seem to end the day we are looking.
There are also various forms maintenance that need to be done and costs money. This year we have had to re-stain our house and deck. Earlier in the year I got an eye exam and new glasses. These can be nuisance expenses but if you don’t maintain your house properly then the expense later will be much more than a nuisance.
A modest but comfortable lifestyle in today’s dollars might require $50,000 for regular expenses and maybe another $5000 for some sort of annual trip. If $30,000 might come from social security (combined his and hers) then these folks might need a portfolio of $625,000 to make up the difference assuming the 4% rule and that neither spouse has a job.
If these folks take their annual trip in June and then later that summer the transmission goes out on the car, their dog needs hip surgery, there is a failure with the heating/cooling system in their house and their portfolio goes down 20% in a 30% stock market decline and these folks have a real problem. And I would guess that going into this little scenario these people were in much better financial shape than the vast majority of people, one very unlucky summer and something will have to give immediately.
A few months ago a reader on Seeking Alpha tried to argue that the notion of one offs was not really a problem and rationalized away whatever examples I used. I imagine that if you live in a rent controlled apartment in NYC with no pets, with a grocery store and subway stop within a block then you will have no one offs with where you live, and no one offs with your car (this assumes you wouldn’t own one) and if you have the best possible insurance you will have no out of pocket medical expenses.
I know someone who lives in a rent controlled apartment in NYC, with no car, a subway stop one block away with a supermarket and more than one drugstore close by as well. He does not have a pet and I don’t know the particulars of his health insurance. So it is possible to mitigate many of these issues.
Part of the planning process then perhaps needs to include looking at where you are likely to be with one offs (if you own a house, pets and cars then you’ll probably have more one offs than the person I mentioned above) and then pad your estimates accordingly. I would not simply take your salary and multiply by 0.7, this is too simplistic. Some expenses will go away and some new ones will pop up. If you live below your means then figuring expense become far more important than relating to your salary. Likewise if you live beyond your means.
Not everything will go as planned for everybody. If you’re numbers juuuuuuust squeeze by you might want to change something in your plan.