Here is a short list of fraught, nearly unanswerable questions a financial advisor gets at a dinner party:
- Is $ 1 million enough for me to retire?
- Will Social Security be there for me?
- How much will I spend on health care in retirement?
- How does anyone afford long-term care costs?
- Is it a good time to buy crypto?
- Should I keep coloring my hair or just let it go gray to cut costs?
These are important questions, but the most important driver of retirement success is this:
How much do you spend?
Most of my clients don’t budget during their working years. They save what they can and spend the rest. The clients who are better off usually have a target savings amount that they execute without fail (barring illness or job loss) and spend what’s left after they save.
That’s all good for the saving years, but when you transition to retirement, knowing how much money flows out of your household (and where it goes) becomes much more important.
Creating a budget often involves fantasy and wishful thinking. “We should only spend $200/week on groceries and $100/week eating out.”
Sure, but is that even realistic? Last month I paid $43 for a burrito, drink, and street corn at a fast-casual strip-mall eatery. It was delicious (and huge – I had leftovers) but forty-three dollars!
If you are preparing to retire/meet with a financial planner, I suggest these steps to get an idea of your spending:
- Go into your bank account(s) and find a link to “Download Account Activity.” Or some such language.
- Click on that link, and you will get the option to send account activity to a spreadsheet or Quicken or maybe other software. Choose your favorite
- Enter the date range of the past 12 months.
- Once the data has been exported, sort by debits and credits (or negative v positive).
- Add up all the negatives. Divide by 12.
Now you know your current monthly spending.
Notice I didn’t ask how much you spend on streaming or booze or pet care. Just how much total.
If your financial planning projections support that level of outflow, great! Continue to spend with abandon.
If the outcomes look less than rosy, it’s time to drill down on the “where the heck does it all go?” question. You may find that:
- Some expenses will go away (kids’ daycare/sports/summer camps/, your mortgage, student loans)
- Some expenses can be cut; Why do you have two Netflix subscriptions?
- You need to change some habits (Lower the $/bottle bourbon bill, do you really use that gym membership?).
- Your housing costs (mortgage/insurance/taxes) will need to decrease in retirement.
Whatever the actions, knowing your expenses is the start of empowerment and enjoyment of your retirement years.
You don’t need to keep receipts and write down all your expenses in a special ledger like your Grandpa Eugene did. The technology exists to make knowing your actual monthly spending easy.
