Discretionary Spending

Discretionary spending is synonymous with what we also sometimes call "consumption." (see consumption smoothing). It refers the amount of money left over to spend after taxes and specified off-the-top expenses such as housing, Medicare Part B, contributions to retirement and other special expenditures have been paid. Our reports refer to this as "discretionary spending." Discretionary spending is the household's most important number because it shows how much a family has to live on each year. Conventional planning programs ask the user to input "how much you need to live on in retirement?" MaxiFi Planner instead solves for this annual amount, showing you the highest, affordable living standard or "discretionary spending" that your household has available each year. For a single person, "discretionary spending" and "per-adult living standard" are the same amount.

Because discretionary spending is an internally calculated amount as opposed to a number you enter, it can be used as a reliable benchmark to compare plans or financial decisions. With conventional planning, if you indicate that you need $80,000 a year to live on in retirement, but then change a setting so that you work two more years beyond the original plan, the amount you need to live on remains at $80,000 because that's what you entered. With MaxiFi, this discretionary spending amount is recalculated and shown to you with every change to your model. Even a trivial change such as entering a $300 expense (or receipt) 25 years from now will create a change in the current year's discretionary spending and each year through to the end of the planning model.

Sometimes the phrase "discretionary spending" creates the impression that it's money we only use for ice cream or movies as opposed to necessities like groceries and gasoline. But MaxiFi Planner uses this word discretionary instead of the more technical word, "consumption," well, because it's friendlier. So it is important to define it clearly. MaxiFi Planner is not an annual budgeting tool so what we call discretionary is distinguished from "fixed spending." Discretionary spending plus fixed spending equals total spending. The Year At A Glance report will quickly and clearly display this distinction. Another way to view the distinction between fixed and discretionary spending is to view the Spending Overview report where you see for each year the following: total spending, discretionary spending, and everything else which is fixed spending.

Discretionary spending typically includes all the spending you have in a given year apart from what is treated in the report as "fixed spending" (taxes, housing, contributions to retirement, Medicare B, special expenses). So in other words, discretionary spending will include your groceries, gasoline, utilities, clothing, etc. There is no need to enter utilities, for example, as a separate expense item. So Total Spending minus Fixed Spending equals everything else spending. This "everything else spending" is what MaxiFI refers to as "discretionary spending." You may know what your utility or gasoline spending is in the current year, but it's pure speculation to presume to know about 30 years from now--or for that matter, whether cars will even run on gasoline 30 years from now. So we treat everything that is not fixed spending as discretionary spending and you can budget that spending allowance on an annual basis as you see fit each year going into the future.

Discretionary spending is also linked to another spending number, "per-adult living standard," or sometimes just "living standard." These two numbers are related to one another by the economies of scale assumption where the default is that two can live as cheaply as 1.6. The per-adult living standard is important because it shows what a widowed survivor needs to have in order to experience the same standard of living as the two together in the household.

When there are children in the household according to your inputs, discretionary spending will be higher in order to accommodate this extra cost for children (the default settings indicates that children cost 70% that of an adult).