When using cash flow-based planning software, it is generally best practice to itemize liability payments, property taxes, life insurance premiums, and certain other expenses such as medical, new vehicle, and lump sum purchase expenses. These, plus the client’s Living Expenses, equal what may be referred to as the Total Expenses. Living Expenses can be defined as the expenses that are ongoing and not itemized elsewhere in the system, including monthly and annual bills, as well as both required (groceries, gas, etc.) and discretionary (travel, gifts to others, etc.) spending.

Clients can sometimes underestimate (or under-disclose) how much they spend, which can result in inaccurate projections and planning. Cash flow based planning relies heavily on dollar amounts for Expenses both Pre-and Post- Retirement and setting the system to spend all leftover cash flow each year may not be enough. It is particularly important to make sure the Living Expenses are set at a realistic level for the Retirement period, even if it is years or decades away. By doing this, in years where the projected outflows (such as Expenses and Taxes) exceed the projected inflows (such as Social Security and Pensions), it is possible to find how much to liquidate from accounts to make up the difference.

When having conversations with your clients it may be useful to frame retirement spending in the context of current spending. People typically want to maintain a similar standard of living once they retire but may not know how to quantify even their current standard of living in a dollar amount. If it can be reasonably estimated how much a client is currently spending, their Living Expenses can either be projected into retirement as-is or adjusted. Inflation assumptions would also be built in.

There are of course many methods to calculate the current Living Expenses figure. Some are more detailed than others, such as having the client provide an itemized list versus a single number for annual or monthly spending. Regardless of how the data is given, it is important to make sure all cash flow has been taken into account. To do this, you can enter all the other “Facts” in a planning software, including known Living Expenses. The system then calculates taxes, as well as the total Living Expenses and amount of unaccounted cash flow.