Retirement finances: what will I spend?

The last post talked about the first step in retirement planning– tracking your expenses.  Until you track your expenses, you’ll have no idea what you’re spending now or what you’ll spend in retirement.  Once you figure out what you’ll be spending in retirement, then you’ll be ready to determine how big an investment portfolio you’ll need for that retirement spending.

So… have you started tracking your expenses yet?

Don’t fall into that popular trap– “I’ll start tomorrow”.  Don’t wait until you develop the ultimate expense-tracking tool or design all your categories or figure out what software you’re going to use.  The next time you pull out your wallet, write down how much you spent and what you spent it on.  Save the receipt.  Remember a descriptive category like “dining”, “entertainment”, “bail” or “transportation:repairs and service”.  Get into the habit of tracking your expenses every day.  Don’t wait for “money day” or for a day when you have nothing else to do.  Start tracking your expenses now.

Why should we track expenses now when we’re trying to plan our retirement budget?  Hey, everyone spends less in retirement, right?  Well, not so fast.

It’s true that you’ll stop spending money on uniforms, commuting, childcare, and office expenses. If you’re not driving as much then your vehicle insurance rates may drop. Your retirement income is taxed at a lower rate and might not be taxed at all by your state. Your lower income may put you in a smaller tax bracket, too. Your retirement tax bill will almost certainly be less.

But now the planning gets slightly more complex. You might be traveling more often, dining out several times a week, and spending more money on recreation. If you’re relocating, your new home might have higher living expenses. You might decide to pay off the mortgage on your home, but if you move to a new area then you may also have a new mortgage. Now that you have the time, you might spend a lot more money on home improvement, landscaping, or hobbies. You may be able to cut back on your impulse purchases or do your own chores and maintenance, but you may need to spend more on supplies.

Make your best guess at your retirement budget. Read about your preferred retirement lifestyles, talk with your family and other retirees, and try to figure out your other preferences. Break your spending estimate down into essential and non-essential groups so that you have more flexibility. As you use this budget to calculate how much you’ll need in your portfolio, you may decide to vary your spending or even to reduce some non-essential spending to reach your goal earlier. You have plenty of options and the process will go through several iterations.

Once you have a retirement spending plan, you’re ready to figure out how much it will cost. If you have enough assets to afford the plan, then you’re all set! If not, you have a number of parameters and options to tinker with. One way or another you’ll make this work.