A Faster, Better Way to Budget for Retirement

One main problem that most retirement budgets have involves their over-optimism and their reliance on rose-colored glasses! Budgets must account for the real-world spending dynamics we all live with, but they often miss these crucial “one-off” items that aren’t always so “one-off” after all.

Like most people, you probably don’t have a lot of confidence in your retirement budget (assuming you have one), and you likely don’t imagine a fun day of budgeting for your hard-earned time off from work before retirement. Most American workers do not budget, to begin with! Yet still, cash flow remains the basis for virtually all financial decisions. Thus, it is paramount for personal financial success to understand your cash flow needs during your retirement years.

Despite this, you might view the budgeting task as time-consuming or complicated, and thus shy away from doing one or updating one from the past. I am not here to try to convince you to do a retirement budget. Plenty of studies show how 25% of people who file for bankruptcy do so because of overspending.

Instead, you have found a streamlined guide here that was developed after many years and thousands of budgets reviewed, to help you get the most out of your own in the fastest way possible. No matter what budget you use, they need to be updated, and this approach helps you simplify the process.

So how do you speed your way to an easy and effective retirement budget?

4 Easy Steps to a Retirement Budget

Step 1: Get your tax records. For most people, the W2 IRS form from your employer is enough.

Don’t worry. You won’t need any tax experience or fancy calculations!  For this example, let’s assume you have no other income sources outside of the company you work for. Your W2 actually tells you how much total income you earned last year in the box titled “Medicare Wages” in box #5. This is your starting number.

Now subtract any numbers shown on your W2 from boxes 2, 4, 6, and 12 (for box 12, you would only include anything that shows with the letters AA, BB, D, E, EE, F, G, H, S (most people will only have one of these letters, most often D or EE, so just see which of these shows on your form, but don’t deduct any DD figures). Also, deduct any numbers in boxes 17, and 19. Depending on where you live, these might be blank.

The resulting figure shows your “Take Home Pay” and represents your actual net take-home pay after all voluntary and involuntary deductions from your pay throughout the year. Save this number for the next step.

Step 2: Look at your bank account balances from the prior year (or whichever account you use to pay for things during the year that is not a credit card or a home equity line of credit). Compare your balance now versus one year ago. If your balance now is larger balance than it was one year ago, subtract the difference from your final Step 1 “Take Home Pay” figure. If your balance has gone down in the past year, add the difference to your ‘take home’ number in Step

Step 3: Are you carrying a balance on your credit card(s) or home equity line(s) of credit? If so, add the entire current balance(s) to your running total from Step 2. If you have no credit cards or home equity line of credit, or if you pay off their balances every month, move on to Step 4. You’re almost done already!

Step 4: Did you have any major financial events this past year? For example, did you pay off a loan, buy a new car, or purchase something big that stands out as a “one-off” event? If that was a debt payoff, congratulations! Now, if this event happened during the first half of the year, reduce your running total by the annual amount of the payments (monthly payment x 12)! If you made a major purchase during the year and financed it with a loan, multiply your monthly payment by 12 and add it to your running total. If you find you actually spent money on something big instead, you guessed it, add the full amount of the expense to your running total. Even if it was a “one-off” expense, you still need to add it. We’ll cover the reason for this below.

Example

Take a look at the following example of this retirement budget:

• Say your W-2 Box 5 was $75,000. Your take-home pay will be the result of subtracting your paid taxes (federal, state, and local income taxes, your social security tax, and your Medicare tax), your 401k contributions, and special deductions from Box 12. If all those boxes added up to $15,000, then your resulting Take Home Pay was $60,000.

• Next, let’s say your bank balance was $2,000 higher this year compared to last year. This means you basically saved some money and can deduct it from your running total of $60,000. This brings your budget down to $58,000

• Now, if you have carried a $3,000 credit card balance for more than one month, add the balance to the running total. Your budget is now $61,000.

• Lastly, let’s assume you sold a vehicle for $5,000 and purchased another car for $15,000. You would add that $10,000 difference to your total, bringing your final budget to $71,000.

What does this mean? It means you spent $11,000 more this year than you actually brought home. No wonder the credit card balance has become an issue!

Using other budgeting methods, you may think about your latest raise at work or the overtime income you’ve earned recently and simply use that new number for your budget. Instead, and as you see, this new way of putting together your budget does not consume much time and yet can be very impactful.

One-Off Purchases

Now, let’s circle back to the “one-off” major expense scenario from Step 4. You may have thought “wait, I don’t buy a new car or take a major vacation each year! That’s a one-off expense!” This is where most people get into trouble with their budget. I am not suggesting that you buy a new car every year, but you would still incorrectly assume this one-off event is once in a lifetime and that it should not count toward your budget!

I’ve gone through countless records which have shown that we often don’t realize how many of these “one-off” events happen every single year! For example, your roof leaked and needed repairs. Your car needed brakes and other repair work. You had a baby. You finally had that big dental procedure done. You get the point!

So, how do you account for these variable “one-off” expenses?

Use your own history as a guide! Rather than trying to track down every single penny you spent in every single category, this exercise shows you only need a couple of figures to make it insightful.

Additionally, you can compare figures from prior years and use this data to find a reasonable average. If you want to use a more conservative figure (which is generally recommended in budgeting), then round the number up to the nearest $1,000, $5,000, or $10,000. However, if you believe going forward that your expenses will decrease (for example, you just made the last payment on your student loan), then go ahead and adjust your budget downward, but do so very cautiously!

Even when you no longer have an auto loan, great, I’d bet that means it’s no longer under warranty either, right? Will your car last forever or need to be replaced? You get the idea.

Often, the first few years of retirement are also the most expensive. Think about it. If you are still working, do you tend to spend the most money on Monday or Saturday? Probably Saturday! Why? Because on Saturday (or whatever day it might be for you), you don’t have to work, and that’s when people spend the most money. Well, guess what? In retirement, every day is like Saturday!

You won’t likely notice the effects of bad budgeting in the early years of your retirement, so save yourself the headache and do your simple retirement budget outlined here early. Now is best! Save yourself time and stress getting ahead of the curve!