If you want to retire successfully and not have to worry, mastering your retirement budget is where you should focus your attention. It’s plain to see why this is so. Even if you work after you retire, your spending is what you have most control over. It just makes sense to put your attention there.
The good news is that this is easy to accomplish even if you aren’t a pencil-pushing geek like me. On top of that, once you have a handle on your numbers you’ll likely relax and enjoy more without feeling guilty . You’ll know you are only spending money you know you have.
What You Need To Make Your Retirement Budget
- Your last 12 or 24 monthly bank statements (joint and/or individual)
- 1 hour
- A new excel spreadsheet or paper, pen and calculator.
- Mozart playing softly in the background – preferably Canzonetta Sull’aria (optional)
Step 1 – What Does It Cost You To Live?
For right now, let’s not worry about how you spend your money. Let’s just try to figure out how much you spend on average on a monthly basis. If you are a regular reader of Wealth Pilgrim, you know that there are several ways to peel this potato. The easiest way is to use my 5 minute a month method. It’s free, easy and fast. What’s not to like? If you go this route all you need to do is gather together your bank statements over the last 12 or 24 months.
Your bank statement tells you exactly what you spent each month. That number is represented by your total withdrawals. Assuming you don’t earn cash without first depositing it into your account, it’s all right there.
Using the 5 minute method, you would go back over the last 12 or 24 months of data and calculate the average spending. All you have to do is mark down the month and the total amount you withdrew each month. Then, calculate the average.
This will take you about 15 minutes the first time you do it and about 5 minutes a month to update each month. (I asked you to budget an hour to do this so you can spend the remaining 45 minutes chilling out and listening to some sweet Mozart. You can thank me later.)
Step 2 Adjust
If you go back over your bank statements over the last several months you might find unusual transactions. If you spent a great deal of money on a one-off item like buying a car or furniture or remodeling your kitchen, you might want to deduct those expenses to get a more accurate picture.
Likewise, if you took a chunk out of your checking and invested that money, you might not want to consider that an actual expense either. Personally, I do budget for monthly savings because it’s as much a cost of living as anything else but not everyone does this. You will also have to make adjustments if you pay off a debt or build up a debt balance. Read the post on the 5 minute method for more details.
If you know your future spending will be different, adjust for that as well. For example, you might know that your home mortgage will be paid off next year. That’s going to reduce your spending. On the other hand, you might have to pay more for medical expenses once you put yourself out to retirement pasture. Make all these adjustments.
3. Match to Income
Since you know what it costs you to live on average all you have to do now is match it to your income.
When you retire, you’ll have social security income, pensions, investment income and potentially part time work income. Add these all up but do your calculations on a monthly basis.
All you have to do at this point is make sure that this income number (after tax) is greater than your spending number.
4. Does it work?
If your income is greater than your expenses, you are in pretty good shape. Continue to monitor your retirement budget and spending. Of course there will be months when your spending is greater than average. But when that occurs dig deeper into the numbers to make sure a new dangerous pattern isn’t developing.
Note: To be accurate, you’ll want to project what these numbers will be after inflation kicks in.
5. What if it doesn’t work?
If your average spending is greater than your retirement income, don’t panic. Nobody is coming to through you onto the streets right now. You still have time to correct the situation. But it is important to get into action.
Go through your spending item by item. Find the cuts you need to make in order for this to work. Can you travel a bit less? Entertain and/or go out to restaurants less? Can you find a little part time job or side business to bring in a few more greenbacks?
If you can’t devise a plan, talk to a mentor or professional advisor. Even if you have to spend a little money, it’s worth it if you can walk out of the meeting knowing exactly what to do in order to balance your retirement budget.
Creating a retirement budget isn’t difficult or time consuming. You have to be willing to confront the truth and take action around it. Once you are on track, it’s important to check yourself constantly to make sure the plan you thought worked still delivers.
Does your retirement budget work? What did you have to change in order for this to happen? What more do you plan on doing?