Why one number fails
Investment advisory services described on this page are offered through Avinci Wealth Management, Inc., a Registered Investment Adviser registered in California, Arizona, Illinois, Texas, and Nevada. This page is general information for educational purposes and is not tax, legal, or individualized investment advice. Avinci does not prepare tax returns. Confirm your own position with your CPA.
Most retirement conversations start with a single figure: the monthly amount the household expects to spend. It is a reasonable place to begin and a poor place to stop, because that figure averages together four kinds of spending that behave nothing alike.
Essential costs continue whether markets cooperate or not. Discretionary spending can be reduced in a bad year without changing how anyone lives. Contingencies arrive on their own schedule. One-time items have dates attached and can often be moved. A projection that blends them into one line cannot answer the question it is usually built to answer, which is what happens if something goes wrong.
Separating them changes the design of the plan. Once essential spending is identified, it becomes clear how much income the household needs to cover regardless of market conditions, and how much of the plan can safely flex.
The useful question is not what you spend. It is which parts of what you spend can move, and which cannot.
The four categories
| Category | What it covers | Planning characteristic |
|---|---|---|
| Essential | Housing, food, utilities, insurance premiums, health care, transportation | Continues regardless of markets; generally the figure a reliable income source is sized against |
| Discretionary | Travel, hobbies, dining, gifts, club memberships | Can be reduced temporarily without changing the household's standard of living permanently |
| Contingency | Home repairs, vehicle replacement, family support, uninsured medical costs | Timing is unpredictable, but the annual average over a long period is reasonably estimable |
| One-time | A relocation, a major purchase, a wedding, a milestone trip | Has a date and an amount, so it can be planned for and often moved |
A general framework rather than a recommendation. Which items belong in which category depends on the household.
Contingencies are the category most often left out, usually because they feel like emergencies rather than budget lines. They are not. A household that owns a home and two vehicles will replace a roof and replace cars, and the only uncertainty is when. Leaving them out produces a projection that looks sustainable until the first one arrives, at which point the money comes from somewhere unplanned, often a tax-deferred account in a year when that was the expensive place to take it from.
The shape of spending over time
A projection that applies one figure across thirty years assumes retirement spending is flat. For many households it is not.
The early years often carry higher discretionary spending: the travel that was postponed while working, home projects, time with family. Middle retirement frequently settles lower as the pace slows. Later years can rise again, driven mainly by health care and by the possibility of care costs that have nothing to do with lifestyle.
The shape matters because it interacts with everything else in the plan. Higher spending in the first years means larger withdrawals at precisely the point when the portfolio is most exposed to a poor market, which is the concern covered in sequence of returns risk. It also means the bracket-management opportunities of the early retirement years can be narrower than a flat projection suggests.
None of that argues for spending less early. It argues for knowing the shape in advance rather than discovering it.
Where one inflation rate breaks
Applying a single inflation assumption to the whole budget is convenient and understates the later years, because the categories do not inflate together.
Health care costs have historically tended to rise faster than general consumer prices. Property taxes in California behave differently again, because Proposition 13 limits increases in assessed value for as long as the property is held, which makes a long-held home comparatively stable. Discretionary spending is the most controllable of the four and the least in need of an inflation assumption at all, since it is already the flex.
A projection that treats these separately gives a different answer in year twenty than one that does not. The practical step is to apply category-specific assumptions and to state them explicitly, so that when the plan is reviewed the assumptions can be tested rather than inherited.
Inflation assumptions, health care cost trends, and tax rules change and are not predictions. Any projection is hypothetical, depends on the assumptions used, and does not guarantee future results.
California-specific lines
Several budget lines behave differently here than the national templates assume.
- Property tax. Proposition 13 limits increases in assessed value while the property is held, so a long-held home can carry a property tax bill far below what its market value would suggest. Moving generally resets that, which is a real cost of downsizing that rarely appears in a budget.
- Income tax. California does not tax Social Security benefits, but it generally taxes taxable IRA, 401(k), and pension distributions as ordinary income. Gross withdrawals therefore have to be larger than the net spending figure.
- Health coverage before 65. For households retiring early this is often one of the largest line items, and it is income-dependent rather than fixed. Retirement health care before and after Medicare covers the mechanics.
- Insurance on the home. Coverage availability and cost in parts of Southern California have changed in recent years, which makes this a line worth confirming rather than carrying forward.
Turning it into a withdrawal plan
The projection is an input rather than a deliverable. Three things follow from it.
The first is the gap. Subtract reliable income sources, Social Security and any pension, from essential spending. What remains represents the spending gap the portfolio and other available resources may need to support, and it is the figure that most shapes how conservatively the near-term portion of the portfolio is positioned.
The second is the gross-up. Spending figures are after-tax; withdrawals are pre-tax. The projection can then be translated into estimated gross withdrawals using assumptions about the household's federal and state tax brackets, including the California layer, which is where withdrawal order starts to matter.
The third is the test. Once the projection exists, scenarios can be run against it: a poor market in the first years, a long-term care event, an earlier death of one spouse. The point of separating essential from discretionary is that these scenarios can show what has to be protected and what can flex, rather than producing a single pass or fail.
How Avinci builds it
Avinci Wealth Management is a Registered Investment Adviser registered in California, Arizona, Illinois, Texas, and Nevada, firm CRD #327780, headquartered at 23929 Valencia Blvd, Suite 404 in Santa Clarita, with additional offices in Beverly Hills and Woodland Hills. When providing investment advisory services, Avinci Wealth Management is subject to its fiduciary obligations under applicable investment adviser law.
Under the Retirement Blueprint, the expense projection is built year by year with the four categories separated and the assumptions written down, then run against the income plan and the tax position rather than kept alongside them. Founder Lindahl Lucas personally oversees the development of each Retirement Blueprint. Tax scenarios are modeled in coordination with your CPA, who prepares the returns.
Avinci receives advisory fees for investment advisory services. Separately, insurance and annuity products may be offered through our affiliated insurance agency, Lucas Insurance Services, which may receive commissions from issuing insurance companies. This compensation arrangement creates a conflict of interest and is disclosed in our Form ADV.
Important disclosures. This material is for informational purposes only and should not be construed as individualized investment, tax, or legal advice, or as a recommendation to buy or sell any security or insurance product. Consult your CPA or attorney before acting on anything described here.
Registration. Investment advisory services are offered through Avinci Wealth Management, Inc., a Registered Investment Adviser, firm CRD #327780, registered in California, Arizona, Illinois, Texas, and Nevada. Registration as an investment adviser does not imply a certain level of skill or training. Our Form ADV Part 2A brochure describes our services, fees, and conflicts of interest, and is available on request and through our IAPD record. The firm can also be verified through the SEC adviser search and, where applicable, FINRA BrokerCheck.
Projections. Financial projections and retirement models described here are hypothetical and illustrative in nature, are based on assumptions provided by the client and on market data, and do not guarantee future results. Inflation, tax, and health care cost assumptions are estimates rather than predictions.
Tax rules. Federal and California tax and property tax rules described here are general summaries, reflect published law as of the date of this article, and are subject to change. Avinci Wealth Management, Inc. does not prepare tax returns or provide tax advice.
Insurance and risk. Insurance and annuity products are offered through our affiliate, Lucas Insurance Services, which may receive commissions from issuing insurance companies on products it places. This compensation arrangement creates a conflict of interest and is disclosed in our Form ADV. Guarantees associated with annuity and insurance contracts are subject to the claims-paying ability of the issuing carrier. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not indicative of future results.