Estimating Retirement Expenses: An Untapped Opportunity

By: Mathew Greenwald

The foundation for retirement planning is estimating what expenses will be after retirement. After all, how can people determine how much to save for retirement without having a good sense of how much income they will need to will cover their expenses? Unfortunately, estimating future retirement expenses is a struggle for many; Greenwald Research found that this crucial step is frequently not implemented accurately or not completed at all.

This failure to estimate expenses weakens the effectiveness of retirement planning and prevents financial professionals and retirement plan providers from taking advantage of a major opportunity to strengthen relationships with clients and plan participants, retain and consolidate assets, and enhance the lives of those they serve.

There are three major deficiencies in the way many financial professionals and plan providers approach estimating expenses in retirement and I will discuss each.

Helping Pre-Retirees Estimate

Retirement represents a fairly new opportunity for fulfillment and enjoyment. Even as recently as 1940, the average age of retirement was 70 while life expectancy at birth was 61[1], so most people were unable to retire. But now, the average person has a retirement period of over 20 years[2] while remaining mostly in good health, with the financial ability to engage in many activities.

Sadly, many people don’t think through what they want to do after they retire so they can plan for, financially and otherwise, and experience the most meaningful and enjoyable retirement period possible. Fortunately, financial professionals are uniquely positioned to help people plan their ideal and achievable retirement. Some financial professionals report great success using techniques such as visualization or by taking the role of a life coach.  Clients benefit of course, but so does the financial professional, in terms of consolidating assets,  increased referrals and the satisfaction of helping another human being in a meaningful way.

But these cases have not been frequent enough. Companies in the retirement market could do a much better job , I believe, than they have to date by helping financial professionals more effectively assist their clients in thinking through how they want to use the time they have in retirement. Two approaches seem most appealing:

  • Developing and training financial professionals to use a visualization technique or other approach to help imagine and decide how best to live life in retirement
  • Developing several “retirement packages” for people to choose from and give them the best tools to make this choice

Creating a method to help people best decide how to spend their retirement years—and save for their planned spending in retirement—represents a major opportunity for companies in the retirement business.

Deficiencies of the Estimation Process

Our research has revealed that the estimation processes many financial professionals currently use often have serious gaps and inaccuracies. For example, clients are typically first asked what their expenses are in the present, while they are still working. Financial professionals report that many of their clients do not know their expenses, but that can be addressed by an analysis of their current spending, often with programs that can analyze clients’ checkbooks and establish current spending levels.  That part often works well, but what happens after current spending is assessed often works less well. Spending almost always changes in retirement for several reasons, and there is a tendency to not accurately estimate those changes.

Almost all people go from subsidized health insurance when they are working to unsubsidized Medicare and a supplemental insurance policy or Medicare Advantage plan when they retire. The costs change, and most financial professionals have no idea what health care costs—including health insurance and dentistry—are for retirees, despite health care comprising a major cost in retirement. This means a considerable expenditure is not accounted for well, if at all, in estimating retirement expenses.

Also, new costs will often emerge in retirement due to the sudden availability of  more time being available when work ends.  One common way this new availability of time is filled, especially early in retirement, is with travel, which can be very expensive. Some have tried to address the change in spending after retirement through a replacement ratio, assuming that post-retirement spending will be some fraction of work expenses. These assumptions are typically faulty.

Another problem with typical estimates of spending in retirement is that they often focus on stable spending, which is the type that occurs on a weekly or monthly basis and omit irregular and unpredictable spending and costs that are just about certain to occur, such as repairs or replacements on cars, furnaces, roofs, air conditioning systems, and plumbing. Inflation exacerbates this omission. For example, if inflation stays at just 3% a year, which is undoubtedly wishful thinking, a car purchased in 15 years will cost at least 55% more than it would now. Add up all the costs of repair and replacement during retirement, and they can easily total more than $100,000. Omitting this item would be a big oversight.

There are other unpredictable expenses. Far too frequently, a retiree’s grown children will run into a financial difficulty—like the loss of a job, divorce, or other change—and the retiree will want to provide financial assistance.

Also, how many times in a 20-year period will a person want to make a major luxury purchase or give a luxury gift? I submit this is bound to happen more than a few times and these luxuries can be very meaningful and easy to afford if planned for, but a problem if not planned for. I have talked to financial advisors who have wealthy clients who develop a desire to purchase a yacht or join an expensive country club or want to move into a very expensive housing facility that provides assisted living and a variety of amenities, but costs over $100,000 per year. A number of financial professionals report instances when their client’s budget could not accommodate the expense and they told me of the consternation that followed. The antidote to this situation is to think through the possibility that a desire for a luxury purchase may emerge over a 20 or more year retirement and decide how much to put aside for that.

Motivating Clients to Estimate

Sometimes, financial professionals face a failure to motivate clients or plan participants to do the work necessary to estimate what expenses will be in retirement. To some clients or plan participants the task seems tedious or they are afraid of the results, or they do not see the point, or there are  other reasons. To overcome this, clients need to be sufficiently motivated.

Financial professionals and retirement plan providers should focus on developing more effective messages to motivate clients and plan participants to take on this task. The estimation process can and should be an enjoyable experience because it permits people to think about how to maximize what should be one of the most satisfying periods of their lives. Since there are many benefits to making this estimate, better motivational approaches are clearly achievable.

Motivation will not get all clients and participants to go through the process of making an estimate, but better motivation should lead to higher rates of estimation. There is a very positive story that can be told about the value of estimating expenses, yet many financial professionals and plan providers do not know how to tell that story to their clients.

Timing Clients’ Estimated Expenses

The best time to make an estimate of expenses in retirement is an important consideration. Clearly, it cannot be completed too far out, because it is hard for younger people to imagine life in retirement, but also it shouldn’t be too close to retirement because people may need the time to save more money once they consider what they want to do. Raising the issue with clients ten years before their target retirement date—and becoming very insistent five years before they want to retire—seems optimal.

Cost of Incorrect Expense Estimates

Failure to effectively estimate retirement expenses is costly to workers. Bad estimates or none at all can lead to less effective planning for retirement and, in at least some cases, a retirement that is less satisfying and financially secure than it could have been. It’s also costly to financial professionals and retirement plan providers who may be retaining and and consolidating fewer assets than they could have, and having a less positive impact on their clients’ and participants’ lives.

Need more data on retirement, or any other industry? Contact Greenwald today to start your own research initiative.


[2] Charles D. Ellis, Alicia H. Munnell, and Andrew Eschtruth, Falling Short: The Coming Retirement Crisis, Oxford University Press, 2014, page 36