The Cost of Getting Your Spending Wrong
How small changes in spending shape your plan more than you think
It Looks Small at First
Spending an extra $20K per year in retirement could cost you hundreds of thousands of dollars and years of additional work.
That’s because financial independence (FI) is a series of tradeoffs played out over time. Or as I’ve come to view it, it’s an ever-changing equation. And small changes in one part of that equation can quietly reshape everything else.
Change the Inputs; Change the Outcome
Let’s walk through an example:
Tommy is 55 and spends about $100K a year. He had planned to spend about the same when he retires at 62. We’ll use a conservative 4% withdrawal rate, the rate Tommy plans to pull from his total investments each year to cover his annual expenses. $100K divided by 4% is $2.5M. Tommy’s FI number is $2.5M.
But now let’s say Tommy has discovered he loves to travel and wants to do more when he retires. He wants to increase his annual travel budget by $10K. Tommy also recently learned he’s going to need to start buying a prescription drug not covered by his insurance. This is something he’ll have to take the rest of his life. The annual cost will be another $10K.
This means Tommy’s annual spending in retirement is increasing $20K.
But is it that simple? Some might want to treat it that way. Increase our new annual spending in retirement to $120K, divide by 0.04, and arrive at our new FI number: $3M.
But that assumes his spending stays constant throughout retirement. It won’t.
Spending Doesn’t Stay the Same
Yes, some costs, like that lifelong prescription, will remain each year. Others, like travel, change over time.
Deciding on a realistic travel budget has been a challenging area for myself. My wife and I love to travel, but we aren’t sure how long into retirement that passion and drive will remain.
You may have heard of the go years, slow years, and no-go years of retirement. You go hard early. You have energy, excitement, and hopefully good health. You slow down as the novelty wears off, priorities change, or getting around becomes less enjoyable and more of a challenge.
We need to consider how long that $10K increase in Tommy’s travel budget is likely to continue. Maybe it’s $10K for the first five years, $5K for the next five, and then nothing beyond that.
There’s no way to know how long anyone will be healthy enough to travel. So, we make a reasonable estimate. This is when you might hear someone say, “Just be conservative in your estimate and you’ll be fine.” That approach sounds safe, but it comes at a cost.
When every assumption is conservative, the result isn’t cautious—it’s excessive.
I’m not suggesting you never be conservative. But we need to be aware if our assumptions are tilting that way.
This can lead to significant over-saving. And even worse, the tradeoff is delaying retirement or making unnecessary sacrifices on the things you want during what could be your healthiest remaining years.
Open a spreadsheet every now and then and spend time playing with the numbers. Develop real assumptions. You might save a lot of your valuable time and money in the long run.
The Tradeoff:
Let’s compare the two scenarios.
If Tommy assumes he’ll spend $120K every year in retirement, his FI number jumps to $3.0M.
But if we adjust for how his spending is likely to change over time—higher travel early, lower later—his required savings may look more like ~$2.7M. That’s about $200K more than his original plan.
That $200K is a tradeoff.
It may mean working longer or saving more today, but future Tommy gets something for it:
More travel and experiences
More time with family and friends
More of what he values
That may be worth it to Tommy if it’s what he truly values.
When the Assumption Goes Wrong:
I’m more concerned with the additional $300K he would plan for if he treated that higher travel spending as permanent.
That $300K difference is:
Several more years of work
More aggressive saving today
Or both
And most importantly, it doesn’t provide him anything he actually needs to enjoy the life he wanted in retirement. He could have done it all while giving up much less.
This is the result of a flawed assumption—not a conscious decision.
Think about what you’re actually basing your assumptions on. As the example above showed, the difference between what you estimate and will actually spend can be significant.
Have you put some real thought into your assumed spending? Anything you might want to revisit?
The biggest cost in FI isn’t running out of money. It’s building a plan around assumptions that were never true.
That’s why the goal isn’t to be conservative at all costs.
It’s to be thoughtful about the assumptions you’re making—and what those assumptions cost you.
The $200K increase is an intentional choice. The $300K on top of that is the cost of an incorrect assumption.
Your FI number goes up when we increase spending. That’s obvious. But that spending doesn’t have to remain high. Know when you might pull back spending or look to cut it elsewhere and your FI number will come back down.
That’s the FI equation in action. Change the inputs, and you change the outcome.
Final Thought:
Every additional dollar you spend changes the equation. Some of that spending will be worth it. Some of it won’t. That difference isn’t the amount. It’s whether it reflects what you actually value.
Because even if it doesn’t, you’re still making the trade. You’re just not choosing it.
— Brad
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