Life of an Engineer: Cash Flow Analysis

In what follows, we guide you through the expense profile of a high earner during his or her working years and in retirement.

Using an Engineer as a proxy for a working professional, we take you through his or her working and retirement life, accounting for all income and expenses therein. First, we establish a framework to analyze recurring spending needs.

The four categories of recurring spending are:

  • Living Expenses cover most non-discretionary expenses such as utilities, car/home maintenance, personal/family and basic entertainment expenses.
  • Housing includes monthly payments but not (in this analysis) the down payment.
  • Income Tax is the total tax paid every year.
  • Savings is what is left after money spent on the other three categories

A balanced approach to spending is one in which the four quadrants are roughly equal. Housing and living expenses behave like fixed costs, and they dictate our lifestyle. It is also difficult to change housing costs or non-discretionary spending overnight. Taxes and savings vary with income. To quote Warren Buffet: “Don’t save what is left after spending; spend what is left after saving.” He is referring to discretionary spending which can be modified.

The expenses in 3 of 4 quadrants become less by the time one retires. With good financial planning, housing should be paid off by retirement. Income taxes should be near 0 if the assets have been rightly allocated in a tax-optimal manner (Read “A Framework for a Tax-Free Retirement” for more details). Retirees obtain income from savings, and don’t add to it. Hence, the only remaining category in an ideal retirement lifestyle should be the living expenses. However, discretionary expenses such as travel tend to increase during the early years of retirement, while increased health related expenses such as Long-Term Care (LTC) may increase in the later years of retirement.

Let us look at a layout of income and expenses incurred during a working lifetime. We all, typically, start working in our early 20s and work for about 35-40 years before retiring. We then also need to plan for another 35-40 years in retirement in accord with how life expectancy continues to increase.

Income growth at 4% CAGR will be 4x in 35 years, when the time of retirement is nearer. The bump in the housing category indicates purchase of a primary residence. The college expense includes public in-state tuition and boarding for 2 children. On an average, a person will end up buying 7 or 8 cars in our lifetime. LTC is an expensive burden in retirement and 70% of seniors will need some form of LTC (described in detail in “LTC Facts and Economics”).

Added together, these expenses far exceed income. Even for a high earner, income alone cannot cover all expenses. This makes investment growth from savings and tax-optimized financial planning an imperative.

We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at Karthik@FinCrafters.com

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