John M. Hoffman
Is John Retiring? NOT JUST YET...
The first thing I need to know is how much I want to be able to spend (in
retirement) on an annual basis. That is quite a challenge. I am not even
mentioning fear of inflation to things such as health insurance, medical
care, or food costs. I find it difficult to nail down a number for annual
spending including travel, recreation, charitable giving, and most difficult
of all spending on family (both the generation above and below me). Letís
say that I have a budget of $120,000 and that includes income taxes.
have no idea of what their "budget" is. Here are several ways that you can
determine your budget:
Look at what you earn and what you have left. What
you have left is more than an increase in your checking account balance;
it includes how much you added to savings including retirement, how
much extra you paid down on your mortgage principal, and what
extraordinary things (like a child's wedding). If you earn $100,000 per
year and at the end of the year you have not saved anything but instead
owe $5,000 more on your home equity loan than at the beginning of the
year it would sound like you are spending $105,000. Once you know what
you are spending you can start to think about how you might want to
change that for what you want to be able to spend when you retire.
Write down everything you spend. I mean everything.
The best way to do this is with some software like Quicken or
QuickBooks. Start with each paycheck and account for every nickel. It
does not matter if you have a $100 per week allowance for "walking
around money", so long as you know how much that category is. Once you
have a year or more of this tracked you can take a look and determine
what you think you should spend in each category.
And of course there is the traditional way to make a
budget. Start with your monthly mortgage payment and end with your
walking around money. Create a line item for everything you plan to
spend. Then (and very important) you need to keep track of what you are
spending in each category and see how realistic your budget was based on
what you are spending.
Don't get tricked by things like an automobile. If you are not making car
payments right now, that does not mean that you don't need a line item in
your budget for the expense of owning a car (beyond insurance, gas, and
repairs). If you buy a new car every five years, put something in your
budget for that amount spread over five years.
When retired, you might plan on spending less on dress clothes and more on
golf shoes. Less on business lunches and more taking your spouse to dinner.
Think about what you plan to be doing with your time when you are retired -
and what that will cost.
I also think much about health care costs. I look forward to the day that I
go onto Medicare but I realize that I must budget for some sort of Medicare
supplement insurance policy, and I must anticipate that I will be required
to make some contribution (based on my income) as Medicare premiums
(deducted from my social security benefits).