In the first part of this post, I discussed how when planning for retiring clients, it’s crucial to get an understanding of what the client’s goals are in the first place, so that recommendations can be made about how to financially secure those goals. I also gave specific examples of how to go about it. In the second part of the post, I’ll explain what is “essential” for retirees versus the needs of accumulators.
In the general case of spending, where people are ultimately are constrained by income and must make spending and saving decisions with the income they have, it is valuable to distinguish between needs and wants. In the case of retirees, however, the situation is somewhat different—for the simple reason that if retirees are not satisfied with the total level of spending available, the retiree can choose to spend less and save more before retirement, and/or can choose to work longer to accumulate more before retiring (at least to the extent health allows).
Thus, in the case of the retiree, there is an interaction between “essential” needs in retirement and the decision to retire at all: if your accumulated savings can afford only the bare essentials and not the full amount of the “discretionary” desired lifestyle, the prospective retiree keeps working until the entire lifestyle they feel is “essential” is affordable!
As a result, in all but the situations where retirement is forced due to external circumstances, the distinction between essential and discretionary spending appears to be less relevant. If there are only sufficient assets to afford essentials but not the desired discretionary spending, the prospective retiree keeps working until they can afford their entire lifestyle, including the essentials and a desired amount of lifestyle discretionary spending.
From there, if returns are even better than anticipated, lifestyle can always be upgraded further. But from the perspective of someone considering the retirement decision—who has a choice about whether to retire or not—the goal rarely is to secure essential spending and take the risk that the rest won’t be affordable because it’s just “discretionary.” Instead, the typical goal is to afford the entire retirement lifestyle.