How Flexible Is Your Retirement Spending Plan? 

Bob French, CFA

by Bob French, CFA

November 22, 2016

A lot of expenses are negotiable, but many just aren’t. You have to buy groceries. You have to pay your homeowner’s insurance premiums. You have to go on that golf trip this winter (this one may be open to debate).

As we’ve discussed in the past, it can be very useful to break expenses down into fixed and variable. Another big way to categorize retirement expenses is as essential and discretionary. Where fixed and variable expenses focus on which expenses can be lowered, essential and discretionary expenses are about determining what costs must be paid and what you could go without in case of an emergency.

What Are Essential and Discretionary Expenses?

Essential expenses are the things you really need to pay for – either because they are necessary to live, or they are meaningful to you. Expenses should be classified as essential if they would be among the last things you’d give up if something happened to your retirement income.

discretionary and essential expensesDiscretionary expenses are the things that you want to do, but are willing to sacrifice if something happened to your retirement income.

Everything you’d be willing to sacrifice before you give up your essential expenses would be classified as discretionary. It’s not that discretionary expenses aren’t important to you, but they’re not among the most important.

But, like most dichotomies, this isn’t truly binary – it’s a continuum. Very few things are truly essential – food, shelter, that’s pretty much it. But there are plenty of items that would really hurt to have to reduce or give up entirely. When sorting essential and discretionary expenses, the goal is to figure out what proportion of your spending is in that “really hurts” group, and how much is spent on things that wouldn’t cause you quite as much pain to go without.

Why Do Essential and Discretionary Expenses Matter?

Just like with fixed and variable expenses, identifying your essential and discretionary expenses helps determine where you can be more flexible with your retirement spending. If another 2008 hits two years after you retire, how much can you dial back your spending so the rest of your retirement plan isn’t thrown off-course?

The more essential expenses you have, the less flexible your retirement spending becomes. If a good amount of your spending is discretionary, you’ll be able to make adjustments without feeling it too much.

So What Does That Mean for My Retirement Plan?

This isn’t just a thought exercise in case things go wrong. It has a real impact on how you structure your retirement income plan. You want to be confident that you’ll be able to pay for your essential expenses, so if you have more of them, you’ll want to incorporate reliable income sources into your retirement income plan.

If more of your expenses are discretionary, you can afford to take more risk. More of your income can come from your diversified investment portfolio. Flexibility is a desirable quality in a retirement spending plan because if (ok, when) we run into a bad market situation in the future, you can adjust your spending to match the situation.

If you understand how much spending flexibility you have, you can build your retirement income plan to match up with the right level of risk for you and get on the path to a secure retirement.

For more on making sure that you are ready for retirement, take a look at our ebook, I Want to Retire Soon


Retirement Researcher is owned by McLean Asset Management Corporation (MAMC), which is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.
The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.