How much does it cost you to live? This is one of the first and most important questions that I ask a potential client when we start to build out a financial plan together. Surprisingly, many people don’t really know their all-in cost of living.
For most people, their top priority when it comes to planning for retirement is ensuring that they will be able to maintain their desired standard of living for the rest of their life. Does that standard of living consist of $5,000 per month in expenses? $10,000 per month? More? There is no right or wrong answer, and oftentimes that number will change over time as houses are paid off, kids move out, etc. However, by knowing what it costs you to live today, we can start to have a useful discussion about constructing a long-term financial plan.
For me, every quality financial plan includes a budget. This can seem a bit rudimentary, especially when working with high net worth individuals and families, but it drives the entire financial planning process. Determining a cost of living by way of a budget gives clarity with respect to how much can and should be saved on a regular basis, how big one’s portfolio needs to be by retirement, which types of retirement accounts make the most sense, when a logical retirement age might be, how much life insurance should be in place, how much cash should be in an emergency fund, how much risk and return should be built into the portfolio, and the list goes on.
Oftentimes, I find that some of the simplest financial planning topics tend to be the most impactful. So, do you know how much it costs you to live?
All comments and suggestions are welcome.
Christopher W. Frayne, CFA®, CFP®