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If you’re in your 50’s (or a little younger), retirement planning has probably crossed your mind a few times. Though retirement may look like carefree Nirvana, it still takes some work to realize your dreams.
There are a lot of articles about how to save your money, how much to save, and where to save it, but there’s one area that’s mentioned seldom …
*** I’m not a retirement or financial planner, I’m just a 55-year-old who has gone through this drill every year for the last five years. For more complete guidance, please check with a professional financial planner. ***
The Thing No One Talks About
There are countless articles with calculators and advice about how much money you’ll need in retirement.
Don’t get me wrong, calculators are great and advice from insurance and investment companies, though self-serving, has some good value. You need to examine all information through a filter for what’s right for you. Don’t let them scare you with information that may lead to rash decisions. Calculators have one size fits all or a few sizes fit many approaches as do insurance and investment companies. A lot of advice out there is designed for the masses rather than for the individual.
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What no one actually talks about are the nuts and bolts about how to organize yourself to find out how much money you’ll need to live on.
The person who’s planning on having a quiet retirement with gardening and grandchildren won’t have the same monetary needs as the person who’s going to travel and play. The person who volunteers their time to charities has different needs from the person who’s a caregiver for a spouse or parent.
Every person’s needs in retirement are different, there is really no one size fits all plan.
However, a little work now can take the guesswork out of tomorrow. This work is to understand what is your current financial situation so you can make informed choices in the years leading up to retirement.
So step A is figuring out what you have. Don’t worry about what you think you’ll need. Once you have a sound picture of the present, choices about the future become clearer.
What Do You Have Now?
Take a moment and look around your world. We have a lot that we don’t tend to think about when we have a job. Some of our expenses and spending are totally on autopilot. At least mine was until I realized that I was about 15 years to retirement and I didn’t have a clue.
- Ask yourself some questions.
- Do I have a house payment?
- What cars do I drive and how much do I pay a month in gas? How much do I spend maintaining that vehicle?
- What payments do I have that go out regularly each month? (electricity, TV, gas, garbage pickup, water, …)
- What do I spend my money on that is a variable amount of money? (restaurants, children, grandchildren, wellness, medical expenses, gifts … )
- What are my yearly or bi-yearly expenses? (membership warehouse, parks and rec pass, Amazon Prime or any streaming service), season tickets, memberships, car insurance, store discount memberships, etc.)
If you have Quicken or Quick Books and have been itemizing, this should be a simple task. If you don’t it will take longer but will still be doable. Since every accounting software package is different, I’ll be referring to entries on a spreadsheet for the rest of this article.
If you don’t have accounting software, start a spreadsheet of your own or download a copy of my Discovering Your Monthly Expenses Spreadsheet (with instructions) from the Zen Resource Library.
Understanding What You Spend Today
Before you know how much you’re going to need in retirement, you have to know exactly what you spend today. From there, it’s just a matter of projecting into the future and calculating how much you’ll need to live on when you do retire. Right?
Well no, not really, because there are a lot of variables particularly if you’re doing this exercise in your 40s or early 50s.
Open up your accounting software or grab your spreadsheet.
What Expenses Do You Have Now?
This step takes a little more calculation but once done, it will give you a pretty clear picture of your monthly outgo.
Start with your home expenses; utilities, house payment, maintenance/upkeep. Save insurance and taxes for the next category.
Food: restaurants, grocery shopping, that morning latte, that afternoon glass of wine. Find the average for each category for a month.
Entertainment; movies, museums, books, magazines, vacations (I lump it in with entertainment because vacation is the ultimate entertainment).
Clothing: Take a year’s worth of clothing purchases and divide by 12 to find a monthly average.
Monthly Debt payments.
The best thing to do with each category is to figure out how much you spend each year and then divide by 12 and take the monthly number.
Annual and Semi-annual Expenses
Now, take your memberships, auto insurance, homeowners insurance, taxes both on your home and your quarterly taxes if you’re self-employed.
Think about school expenses for your kids, Christmas and Birthday presents, and all other occasion expenses.
If you pay your healthcare on a yearly basis and it’s not employer provided, this is also where you would count it.
Add anything else to this that constitutes a yearly expense for you.
Record those in the month that they’re due.
For this part of the exercise, keep it simple and count only after-tax income unless you’re self-employed. If you’re self-employed, make sure you either subtract the taxes you pay from your gross or record them in your spreadsheet. Count all sources of income.
Again, record the income in the months it usually is earned.
You should now have an idea of what your income and expenses are on a monthly basis and how much you have left over.
Discovering what you have is the easy part. The harder part is trying to figure out what you’ll need in retirement has a lot of variables and scenarios to consider.
PS: Financial planners are worth the money to help you with your retirement planning. Research and find a reputable individual or company. I recommend Edward Jones. The firm has an incredible track record and they’re highly reputable. I’ve had an advisor with EJ for 14 years and she’s saved me time and money with my finances and investments. I am not affiliated with Edward Jones, nor am I getting reimbursed in any way for this recommendation. I just love the company and their products.