Retirement budgeting
The bad news is that retirement will involve a budget. The good news is that this budget is yours to refine, change, or even occasionally ignore. It can be as simple as the back of an envelope or as time-consuming as a multi-page spreadsheet. The whole point of your budget is to become comfortable with your spending predictions and to figure out how big your investment portfolio will need to be for your financial independence.
Don’t confuse a budget with a diet or an exercise program. Don’t turn it into a straitjacket. Don’t make it too ambitious, too confining, or too complicated. At first, you’re not trying to eliminate waste or to boost saving– those goals come later. In the beginning you’re only figuring out how much you’re spending. Later you’ll forecast your retirement expenses, and then you’ll make your decisions about how long you’ll have to keep earning paychecks. When you’ve finished with those steps then you can go back and tinker with your budget.
The first part of budgeting is easy: track what you spend. Don’t clamp down on your spending, and especially don’t criticize yourself or your family for wherever it’s spent. Just start recording it in a logbook or a spreadsheet and figure out where it all goes. Use whatever tracking method you want. Generate your own system, download software, or save your receipts– it doesn’t matter. The only goal is to determine how much you’re spending. Later you can decide if your spending is aligned with your values.
Track your spending until you understand where you’re spending your money. This may take only a month or two, or you may get in the habit of tracking your spending for decades (not a bad idea!).
As you continue to track your spending, break your expenses down into meaningful categories. (Most people do this by the month.) Again you can use commercial software or come up with your own categories, but above all you should be able to distinguish between “essential” and “non-essential” spending. You’ll also separate your categories into “pre-retirement” and “retirement” groups.
What software should you use? Well, first you might want to try using a pen and paper or, for those of you with more technology, taking notes on your smart phone. At the end of the day (or the end of the week, or whatever habit works best for you) you could enter the data into a spreadsheet using OpenOffice or even Excel. Keep it simple and cheap. If you have a trial version of money-management software like Quicken then see how you like it, but be aware that the longer you use prepackaged software the more difficult it becomes to switch to something else. You don’t need a lot of fancy features right now and you may prefer other packages. If you want more opinions on financial-tracking software then log on to Early-Retirement.org and see what else they recommend!
Once you’ve gotten into the habit of tracking your spending then you can move on to the next step: figuring out how much you can spend in retirement, and how much you have to save in your retirement portfolio to be able to support that spending. Those are pretty intimidating steps, and they can involve some fairly large numbers, but they are numbers that you will be able to achieve. Don’t get discouraged by your first approximation– we’ll go through the process and then show how to keep tweaking those numbers until you come up with a plan that you (and, more importantly, your family) can live with.
