Weekend Reading: Segmenting Retirement Expenses into Core vs. Adaptive to Create Retirement Buckets

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend reading segmenting retirement expenses Weekend reading segmenting retirement expenses
Weekend Reading

Bucket strategies in the realm of financial planning are plentiful, and one you might have come across includes sorting your expenses into “essential” versus “discretionary”.


Wants and needs: With this approach, essential expenses (shelter, food, water, clothing, etc.) are often tied to a conservative portfolio, and discretionary expenses (travel, entertainment, etc.) align with a more volatile portfolio. The end result means you have more guarantee in being able to account for your absolute necessities in retirement, and if your volatile portfolio performs poorly, your “extra” expenses can be cut.

Blurred lines: Kitces makes the point that the issue with this strategy is the potential for mislabeling what is considered essential or discretionary. For one, items that fall in either of these categories will differ depending on the individual – and two, pinpointing which items are in fact essential isn’t always black and white. For some, “essential” expenses in areas such as food can still include a budget for dining out – Or for clothing, can include upscale brands when less costly options are available.

A defined solution: Instead, Kitces proposes segmenting your spending under each of these categories into “core” (expenses which form the nucleus of your lifestyle) and “adaptive” (the designer clothes or upscale restaurants that are nice to have, but not necessary). The portfolio strategy remains the same, however, the manner in which you’ve addressed all of your expenses is elevated. You can obtain more confidence in knowing your “core” spending is secure, while the expenses you consider “adaptable” have room to be flexible in a volatile market.

Consider this: Your basic retirement income flooring strategy works splendidly in a rising market, but will certain “discretionary” expenses go away completely in a down market? Is there a better way?