When planning for retirement, we frequently think about how much money we should have saved, where we would like to live, and at what age we would like to retire. But what often gets left out of the thought process is how we spend money and what to do with our time at retirement. One of the most important variables in a retirement plan, if not the most important, is household spending – how much do you need to spend for your lifestyle. Surprisingly, whether a household lives lavishly or not, when I ask for that number, I often hear a vague answer that clearly tells me it is not known. Understanding where your money is going is important throughout the accumulation years of saving for retirement, but it becomes critical when retired and living on savings and investments.
People hate the word “budget.” A budget implies restriction and deprivation. Rather than thinking of this exercise as creating a budget, think of it instead as aligning your money with your values. I ask my clients to identify how much their household spending totals each month, by completing a “cash flow worksheet,” so that they can see how much they are spending in different categories. It is also helpful to identify which expenses will end at retirement so that we can insert the lifestyle need into the retirement plan. While it may be tempting to estimate or “guess-timate” the total, it is very important to review spending in a typical month by going back to the credit cards and bank transaction detail to track what is being spent. If there are expenditures that happen only once each year, those must be included. Is this a tedious exercise? Absolutely. Is it necessary? The answer is an emphatic yes.
The good news is that there is insight to be gained at the completion of this exercise. The idea is not to force anyone into a spending budget that they detest – quite the opposite. What often happens is a revelation to the client of spending occurring in an area that is just not important to them while another area of critical importance is being pushed out of reach. For example, if travelling is an important goal in retirement, but excessive dollars are being spent on eating out – much more than the client wants to spend or could guess is being spent – then there will not be enough money spent on travelling. Perhaps leaving money to the grandchildren or to a charity is important or allocating money for a remodel or a new home. If money expenditures are not in alignment with your values or your deepest wishes, then your retirement goals will not be achieved. And by definition, your retirement will not be successful.
In life, if you devote your time and energy toward something, it develops, and it grows, like a relationship with your child or your spouse. Your relationship with money and spending is no different. If you want to control your money to make it work for you, to ensure it is being spent on what is important to you, you must understand your thoughts and emotions about money and your spending. Understanding what you spend money on, whether it is on frivolous items that you did not really want or on important items that bring you joy and contentment is vital. Tracking that spending is a first step to help you to identify what is happening in your life so you can design your retirement.
Luckily, there are apps for your phone that can help. Mint is a popular app, and so is YNAB . These apps make it easy for you to track your spending and provide reporting so you can decide whether changes are necessary.
How you will spend your time is another important retirement planning consideration that has little to do with money, so it gets overlooked. Many people assume that they will figure it out as they go and play it by ear. Unfortunately, people underestimate how stressful retirement can be even if there is plenty of money. Retirement is one of ten most stressful events in life and registers in the top ten on the Life Change Index Scale . You can reduce the stress for yourself by planning ahead, giving some thought to how you will spend your time, identifying what you would like to accomplish or work toward. Where will you meet your social needs, your need for creativity and engagement, and your need for a routine? What is your vision for the future? For many people, retirement is not the end of their lives, but the beginning of a second chapter and a time to create something new. Many people use this new time to do consulting work on their own schedule, write a book, volunteering, or start a new business. Travelling is a common pursuit but may be overestimated in terms of how much of it you would like to do. Writing down your vision and how you want to spend your time into a “non-financial retirement plan” is recommended, so that you don’t forget the things that you have been thinking about doing but may forget about later in retirement. An excellent resource to help is Barry LaValley’s book So You Think You Are Ready to Retire? which is filled with exercises to help you prepare.
If you would like help with these tips and exercises or just want some reassurance, please reach out. We are happy to help you.
–Michelle Gessner, CFP®