I recently met with some affluent and successful retirees who came to see me with some questions on cash flow. They had income of more than $100,000 per year, yet they felt like they didn’t have enough income to enjoy the lifestyle they had grown accustom to. I asked them to tell me the very first thing that comes to mind when they hear the word budget. One said it had a negative connotation and meant having to cut back. The other one said budgeting was financial discipline and being prudent. Most of us would probably agree with one of these two statements.
With all of the nonstop chatter in Washington, DC these days about sequestration and budgeting, the last thing you probably want to read is an article about budgeting. This topic tends to make most people cringe. One of the things I’ve learned by working with very successful and very wealthy people is it doesn’t matter how much money you make or how much income you have because many people tend to increase their lifestyle expectations as quickly as their income increases. A good friend of mine is fond of saying that the luxuries of the past become the necessities of today, and sometimes the most difficult part of budgeting for a married couple is getting both people to agree upon a budget.
Budgeting is simply taking the time to make a conscious disciplined decision about how you will spend your money. The alternative is to spend your time wondering where your money went. During our years of accumulating wealth many of us budget so we can save more. But once you have retired, the emphasis isn’t so much on trying to save as much as possible as it is trying to figure out how much you can spend without having to worry about running out of money. Budgeting in its most basic sense is simply an exercise of comparing your income vs. expense.
The easy part of a budget is understanding how much income you will have. But as you prepare to transition into retirement, you will need to have a solid handle on how much money you spend every month. Doing so will help you determine if you have saved enough to support your retirement lifestyle goals and give you a foundation for structuring an income plan that will provide you with the confidence you will not run out of money in retirement.
Most people have a hard time carrying around a notebook and recording every penny they spend. So if you are comfortable using technology, then you may want to consider using only your debit card for three to six months in conjunction with a program like Mint.com. Mint.com tracks all of your purchases and pulls all of the information from your checking and debit card accounts to help you categorize and track all of your spending. When my wife and I went through this exercise, we were surprised to see just how much of our money Central Market was getting every month. One of the advantages of tracking your spending using a tool like Mint.com and your debit card is it makes it easy to discover where every penny is being spent. When you mix cash into the equation, then creating an honest assessment of just how much you are spending on the little things becomes difficult, and sometimes the little things are what can create big problems. Benjamin Franklin said it best, “Beware of the little expenses; a small leak will sink a great ship.”
Your goal when developing your personal monthly budget is to get a solid grasp of how much money you need every month to pay for basic living expenses. Take into consideration any bills you pay quarterly, semi- annually or annually such as property taxes and insurance. Once you have a clear picture on just how much you need every month then you can start to have some fun and find out how much more you want for things like travel, play and spoiling your grand kids.
Our government has a good track record of making sure our dollars have less purchasing power every year. If you visit the bureau of labor and statistics inflation calculator, then you will find that $10,000 dollars in 1970 has the same purchasing power as $59,350.52 in 2013. So while you may need $6,000 per month in 2013 to have the desired lifestyle, you need to make sure your income plan is flexible enough to be able to adjust to rising costs in future years.
While most people focus on maximizing their income, I’ve also had the good fortune of working with some folks who choose to take a hard look at reducing expenses. One couple in particular comes to mind. They wanted to reduce their expenses, but didn’t want to reduce their standard of living. After two years of research and travel, they decided that their dollars would stretch much further by living abroad than they could by living in Kitsap County. Today they enjoy a moderate climate in what’s known as an ex-patriot community where people from all of the world retire. They say the culture is great, and the weather is incredible. Everyone who lives in their community are all transplants from around the globe, and they are looking to make new friends so they have a vibrant social life. They have a better lifestyle at a fraction of the cost.
Ultimately a budget allows you to understand your basic expenses so that you can construct an income plan to help you get every ounce of life out of the dollars you have accumulated. Retiring without a budget is like taking a road trip without a map. You may reach your destination, but the trip will likely be expensive, wasteful and create a lot of unnecessary worry. Visit my blog at SoundRetirementPlanning.com on the resources page to download a budget data gathering form to help you get started on creating your personal budget.
Also printed in the Kitsap Peninsula Business Journal April 2013 Issue.