Part Three in my Planning for Retirement Series based on my How to Recreate Your Paycheck in Retirement class.
Part one covered why you need to invest for retirement: it’s likely to be longer than expected due to increased life expectancies and people often retiring sooner than planned, inflation erodes purchasing power by half during retirement, and we need portfolio growth on top of our savings to fund a long retirement.
Part two focused on figuring out how much you need to retire, which means determining a safe withdrawal rate from your retirement portfolio, why the 4% rule is a good starting point, and how you can deviate it from it based on your specific financial plan.
In Part Three, we’re looking at how you can accurately build your retirement budget even if you’re years away from retiring.
Tracking Your Spending
Step one is understanding how much you currently spend. Tracking your spending is an important practice, not just for retirement planning. As I explained in my book:
How do you know how much you’re spending and saving unless you keep track of it? How can you improve without a starting point? What spending categories contribute the most to your overall costs? You also need an accurate spending number to build a financial plan.
Track your expenses, at least temporarily, to know where your money is going.
Beyond the Basics: Maximizing, Allocating, and Protecting Your Capital
A key phrase there is “at least temporarily”. It’s time consuming and not something I do every year (much to my family’s relief). The tool I used to use and recommend – Mint.com – is no longer available. Here’s an easy way to manually do it:
- Going month by month, download your checking account activity into a spreadsheet (do it for each checking account you spend out of if you have multiple ones). Categorize the expenditures and then total each category.
- If you use Venmo, Zelle, or anything similar, open those apps and add the activity to your spreadsheet and categorize.
- The expenses for the credit cards you use can be deleted from the tracking sheet since those bills were based on transactions from the prior month.
- Instead, go to each credit card online and do the same thing you did with your checking account(s) and add those category totals to your sheet.
And there you have it. Your annual spending.
Make Adjustments to Your Retirement Budget
You have what you spend currently, but that’s not what your retirement budget. Time to make some adjustments.
- Delete payments for mortgages and other loans that will be paid off in retirement.
- Delete or reduce payments for insurance policies you will no longer need if financially independent, such as life and disability insurance policies.
- Eliminate or reduce expenses related to work.
- Reduce expenses in categories related to your kids becoming independent.
- Add new categories or increases in categories to account for things you’d like to do in early retirement.
- Treat health care costs differently than other categories and factor in pre-Medicare health insurance if you or your spouse retire before 65.
Related Reads
Investing for Retirement (Part One in the Series)
Your Safe Retirement Withdrawal Rate (Part Two in the Series)
