By Bob Stacy
National Institute of Transition Planning
September 15, 2018 — I am consistently amazed when conducting my NITP “Transition to Retirement” sessions when I ask participants a very simple question: “Do you know how much you spend each year?” The answer is almost universally “no”!
Retirement income should be easier to calculate
In preparing for retirement you should know approximately what your income will be. If you are a federal or state worker or you are employed by a larger company, you can visit your HR department and have them provide an estimate of your annuity or pension, which will probably be your main source of retirement income. Then you can add other possible sources of projected income such as 401Ks, Social Security, investment income, TSPs, part-time work and maybe even inheritance. If you don’t have a pension, it will probably be slightly easier to estimate your income.
No matter how much income you may have forthcoming, no one should retire if you don’t know what you actually spend each month. Running out of money in retirement is one of the worst things that can happen to you. So I suggest that you not consider retirement until you know your annual expenses and that you start budgeting immediately.
Beginning today, start tracking ALL your expenses using a spreadsheet you feel comfortable with such as EXCEL, WORD, QUICKEN or Mint.com. Ensure you record every expense, even down to that Starbucks cup of coffee each day. You will be amazed how a simple $5.00 coffee adds up during a full year. And that $10.00 sandwich you eat for lunch at work adds up to about $2,400 a year! So maybe it is time to give up expensive habits, i.e., going out to breakfast and lunch each work day. A simple solution is to start bringing these meals from home. It may be hard at first to break these habits — as research shows it takes 21 days to break a habit — so give yourself some time. Habits are mainly formed from laziness, not necessity.
I recommend you track all expenses for at least a year, if not two, before you retire. This will provide a good estimate to see if your projected income will cover most expenses. And don’t forget to add an ‘emergency fund’ of six months of expenses as well. If income matches or even exceeds expenditures then you should be in good shape. On the other hand, if expenses exceed income then you will need to choose one of three scenarios: cut expenses, work part or full-time, or do a little of both! Nothing is worse in retirement than discovering you are spending more than you earn. Retirement is supposed to be your “happy” years, not one of “stress and sadness.” And if you don’t have the discipline to do this yourself, consulting/hiring a financial advisor is a great idea.
I wrote in a previous NITP article that retirement involves something similar to the real estate mantra of ‘location, location, location’; it is ‘plan, plan, plan’! Ensuring you properly plan a budget by having income equal to or exceeding expenses, your prospects of having a long and happy retirement life will be fantastic!
About the author: Bob Stacy conducts periodic training sessions for federal employers about to enter retirement. As a big fan of Topretirements.com, he contributed this article – thanks Bob. He can be reached at firstname.lastname@example.org
Comments: Have you had experience trying to match up your expected expenses in retirement with the income you think you will get. Please share what you learned in the process in the Comments section below.
For further reading:
Topretirements Blog – Retirement Planning