Focus: Financial - Budget Is Not A 4-Letter Word
Financial tools, tips and tricks to help you save for your dream retirement!
Don't Forget to Feed The Dog
Know how your budget will change in retirement
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You know that, in retirement, your Financial goal is to have more income from Social Security, pensions, investments and other sources than you spend in your monthly budget. But how do you know what your monthly budget will be? Most Financial Advisors and Planners will give you a benchmark estimate that your budget in retirement should be 70% or 80% of your current budget. That may be a good average, but budgets can vary wildly in retirement, so it’s probably safer if you do a little more diligence before you decide where to set yours. For instance, when I retired I stopped contributing to my son’s 529, I stopped all contributions to my retirement accounts and I paid off my house, so I no longer had a house payment and tax planning helped with my payments to Uncle Sam; however, I retired before I was 65, and my son was under 26 and still in college, so I had a pretty hefty healthcare premium to comprehend. If I had just gone with 80% of my current spending, I would have been way off. Here’s a step by step process to estimate your own budget in retirement so you can feel comfortable that you have income to cover it or so you can figure out where to adjust, if needed.
Figure out your current spending
Figuring out your current spending isn’t difficult, but sometimes it’s not easy. The end goal is to write down everything you spend in the month for a few months in a row and then look at trends and averages to see what a “normal” budget for you would be. I know there are LOTS of barriers to this seemingly straightforward process. First, remembering to write everything down is a pain. Secondly, what if someone else’s spending, like a significant other, is also part of your budget? You have to get them to write everything down, too. Sometimes the hardest hurdle is just the emotional reckoning of forcing yourself to commit to paper everything you’re spending money on. I can relate. But, I’ve learned a way to deal with all of those things! I signed up for a budgeting app called Mint and hooked up all of my checking accounts and credit cards to that account. If you do that, Mint will keep track of your spending for you and even categorize it, so long as it comes out of those accounts, and it’s FREE! You’ll have to log in from time to time to recategorize some items where Mint got them wrong, but that’s the only commitment on your part. Do that for three months and then download your spending into Excel. Add anything that is a recurring payment that didn’t show up, like quarterly taxes or annual insurance premiums or other payments that are not monthly. That’s your quarterly budget! Multiply by 4 and, boom, you’ve got your annual spending estimate for your current spending. All of the emotion and mental tax is taken out of the equation. Mint has done it all for you.
Think about what will change when you retire
Now, go through each budget category and figure out if it will change when you retire. Will you pay off your house or downsize? With more free time, will you need the cleaner or the gardener or can you do that yourself? Since you’re home all of the time, will your utility bill go up? Of course, you’ll need to think about healthcare. Will you have a medi-gap or other premium to add? Make sure you remember all of the fun things you want to do in retirement and add a budget for hobbies or travel! If you are planning to get a pet for a companion, don’t forget to add vet bills and dog food! Also don’t forget taxes. They probably won’t show up on your budget download, but they may change in retirement. You can get an estimate of the Federal changes here, or your CPA can help. Next to the column with your current budget, list your budget in retirement for each category. Take this document to a Financial Planner. They can help you with gaps you may have missed or places you might have opportunities. And that’s it! You have a handy dandy document that gets you pretty darn close to what you will spend in retirement!
A couple of hours of your time for peace of mind forever
This exercise may not be the most interesting or exciting thing you do for a couple of hours on a weekend, but it is the best tool I know to help you understand where you stand on your journey toward retirement and financial freedom. It can be an invaluable tool as you discuss your plans and goals with the significant people in your life. The numbers help take some of the emotion out of it. You can use it to find opportunities and gaps to close before you hit retirement. Finally, having something concrete that you fully understand and that relates to the life you want to have in retirement can bring you huge peace of mind as you work toward those goals.
Go forth and conquer your budget! You’ll be glad you did!
Next things, next
Next month, we’ll talk about how to estimate your income stream in retirement and what to do if your income doesn’t cover your budget. Don’t worry! You have lots of options! But get this budgeting started so you can follow along when we get into the income discussion in July.
Actions to Build Confidence
Tiny: Download Mint and hook up your checking accounts and credit cards
Bold: Break out your spending between “discretionary” and “non-discretionary” spending. (Non-discretionary is spending you have to do no matter what, like pay your mortgage and utilities.) Then, think about which of the discretionary categories is most important to least important to you. This can help when income gets tight.
Audacious: Once you know your budget, cut your spending by 10% the following month. Journal what was easy and what was difficult about that spending cut. This will be useful when we talk about options if your income and spending don’t match. (Hint: spending cuts are not the only option if that happens.)
More Reading
Can’t get enough? Check out these resources to help you budget in retirement.
If you don’t like the idea of hooking your accounts to Mint, there are lots of spreadsheets you can use instead. Here’s a nice one from Vanguard.
Want to see how your budget compares to others? Here’s a list of money diarists. These are people that let you peek into their monthly spending. I’ll let you decide whether they’re bragging or complaining… or just making the whole thing up…
A little bowled over by your spending picture? Maybe you can find some expenses that will “magically” go away in retirement. Here’s a list of usual suspects.
OK, you’ve decided your budget is not sustainable and you need to really cut it. Maybe a new locale can work for you. You want sun and fun and skiing and low humidity and you want to cut your spending by 25%? If you want to stay in the US, here’s a quiz you can take to find your dream location on your dream budget.
If you’re willing to move to more exotic destinations, here’s a list of the cheapest countries where you can live well in retirement.
Next Week’s Focus: Purpose
Do you identify as an engineer or a mom or a leader in your field? What happens when those roles go away in retirement? Will you face an identity crisis?
Do you have practical budgeting tips or questions about how to budget in retirement? Comment or hit reply!
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