Retirement Planning? Look at your Budget

By Gary Silverman, CFP®

Last week, as we introduced a new series on Retirement Planning I left you with a question:

How much do you need to accumulate so that your money doesn’t run out before you do?

How much you will need depends on:

• Your cash flow needs (income vs. expenses)
• How long you will need it (life expectancy)
• What you can earn on the money (ROI) relative to inflation (real return)

Starting your retirement planning begins with your cash flow or budget. The easiest thing to do is to start with your current budget (if you are already retired, this is the only step you’ll need). So get it out and begin another column. In it, mark how each income, expense, and savings item will change once you retire.

For instance, before retirement your income categories might include your job and your spouse’s job. At retirement, those categories probably go to zero, since, by definition, that’s what happens when you retire. Replacing it may be pension and Social Security income, so add those. For now, ignore any money coming from your investments. We’ll deal with that number later.

Expenses can change as well. You might be commuting an hour or so to work every day (not that unusual in this rather large state or a high-traffic urban environment). So when you retire, your gas and car repair expenses should go down. You may also need to replace clothing less often.

Other expenses might go up. You have more time to explore, so you might actually drive more. You may take more frequent or longer vacations. Just go down the list and adjust each line separately.

Don’t forget health care. If you are going to retire at 65 or later, look up what Medicare and a Medicare supplemental policy will cost you. If you will retire beforehand and your company doesn’t provide retiree benefits (or you are afraid they might cut them as many employers have) then see what COBRA benefits will cost. You might even be eligible for a supplemented plan on the government exchange. Don’t forget to take into account changes in co-pays and deductibles.

And while you won’t need a retirement savings category anymore, you will still need to save for house repairs, appliance replacements, medical deductibles, and a replacement car now and then. Most of these are non-monthly investments and if it’s been a while, you might forget to account for them.

For those who said, “What budget?” when I asked you to take it out, you’ll need to figure out where your money is going now. You can look back at your checking and credit card statements, but be especially mindful of cash. All of those ATM withdrawals went somewhere and that money belongs in your budget.

In the end we are trying to make sure your cash flow is balanced or in your favor. Next time we’ll look at those cash flow problems that throw you out of whack.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing