Avoiding living expenses estimates in financial planning
Posted: Mon Feb 19, 2024 5:36 am
I was going to reply to my post just below, where living expenses were mentioned, but thought I’d start a new thread for some opinions.
Whenever I read about estimating living expenses, I groan inwardly. If you live in a flat and only have to buy food and pay utility bills, they can be calculated with some accuracy. In my case, though, my situation makes it nigh on impossible for me to come up with a meaningful figure.
So I approach it from the opposite direction: I calculate how much income from working (not passive) I need in order to maintain the financial level from the time when I decided on this plan (Year 0).
I decided in Year 0, with all the various business/home/education loans and other expenses, we can live comfortably earning the ¥x I was then earning. I then drew up a spreadsheet with a column for each future year showing:
① Possible passive income (pensions/drawdowns)
② Payments each year (loans/investments/pensions/health insurance)
③ Net passive income ①-② [useful info but not necessary for calculations]
④ The equivalent income to the ¥x in Year 0, calculated by subtracting each year’s payments ② from the payments in Year 0, then subtracting that figure from ¥x.
⑤ Amount I need to be earning (not passive income) to maintain my financial position at Year 0, calculated by subtracting passive income ① from ④.
Ideally I want ⑤ to be zero, but it doesn’t need to be since I will probably spend less as an old git. Anyway, as I update investment numbers I can at least watch it approach zero. I plan to retire in about 8 years.
Like any method, there are many unknowns, but this method doesn’t require trying to think up a cost-of-living number. It takes a known position and shows how to maintain that.
Anything I'm missing?
Whenever I read about estimating living expenses, I groan inwardly. If you live in a flat and only have to buy food and pay utility bills, they can be calculated with some accuracy. In my case, though, my situation makes it nigh on impossible for me to come up with a meaningful figure.
So I approach it from the opposite direction: I calculate how much income from working (not passive) I need in order to maintain the financial level from the time when I decided on this plan (Year 0).
I decided in Year 0, with all the various business/home/education loans and other expenses, we can live comfortably earning the ¥x I was then earning. I then drew up a spreadsheet with a column for each future year showing:
① Possible passive income (pensions/drawdowns)
② Payments each year (loans/investments/pensions/health insurance)
③ Net passive income ①-② [useful info but not necessary for calculations]
④ The equivalent income to the ¥x in Year 0, calculated by subtracting each year’s payments ② from the payments in Year 0, then subtracting that figure from ¥x.
⑤ Amount I need to be earning (not passive income) to maintain my financial position at Year 0, calculated by subtracting passive income ① from ④.
Ideally I want ⑤ to be zero, but it doesn’t need to be since I will probably spend less as an old git. Anyway, as I update investment numbers I can at least watch it approach zero. I plan to retire in about 8 years.
Like any method, there are many unknowns, but this method doesn’t require trying to think up a cost-of-living number. It takes a known position and shows how to maintain that.
Anything I'm missing?