Even for the best prepared and financially savvy individuals, planning for retirement can be difficult at times. None of us can see the future, and even the most carefully prepared plans can go up in smoke. This doesn’t necessarily mean though that we shouldn’t try to prepare for our retirement future though, since many of the steps we can take now could make the transition to our golden years a little easier. And understanding expenses is one of the key elements that I’ve found helpful in this area as I’ve helped some of my own family members ready themselves for retirement.
An eye-opening experience for some
For those who haven’t tracked their expenses regularly over time, getting a handle on exactly what those expenses are as they prepare for retirement can be a rude awakening. But it may be better to have this shock to the system before retiring than after.
It’s often not that hard to figure out just what expenses are, and there are plenty of online templates listing regular expenses to which amounts can be added. Utilizing one of these templates and molding it to fit your expenses or creating an expense sheet of your own can make the process fairly easy. This is what I did for several of my own family members, not forgetting to add in non-regular events like holiday and birthday gift costs, annual travel events, and other personal or occasional expenses that might not be on a more generalized expense list template.
Expenses may determine income
Unless you hit the lottery, are part of the uber-rich or have a huge pension and don’t have to worry about money in retirement, then your expenses will likely play a big role in how much you have to pull from retirement savings. Seeing just what your expenses amount to may allow you to compare this total cost to your forecasted retirement income. For example, being able to take a total monthly expense amount of say, $4,000 and start subtracting out things like a Social Security check of $1,500, a pension check of $800, and an annuity check of $700 helps you determine that there is a $1,000 monthly difference between expenses and income. In turn, this amount might come from other retirement savings like an IRA, checking or savings account, stock sales, etc. Otherwise it might be time to make some tough decisions.
Necessities, discretionary, and the in-betweens
With all your expenses laid out before you, it might be a great opportunity to start slashing away at some of those non-necessary costs. Going through and marking expenses as “necessary”, “discretionary”, and those “in-between” items can help in this process.
Things like food, rent/mortgage, and certain utilities might be necessities. Meals out, travel, and entertainment costs might be discretionary. Then there are in-between items like certain health-related costs such as regular checkups, vehicle maintenance expenses, the cable bill, and phone costs. While these might seem more discretionary in nature, cutting them could severely reduce quality of life. And if something like cable television helps keep other costs like going to the movies or going out to eat lower, it might be worth keeping while cutting something else like the phone bill, moving to a prepaid version rather than a pricey smartphone plan. Meanwhile, those regular doctor checkups and vehicle maintenance might be keeping you safe and healthy, while cable television is keeping you more sedentary and unhealthy, so it could be worth cutting back on the cable bill to keep these other expenses.
These are the kinds of give-and-take scenarios and hard decisions that might need to be undertaken to find the right balance of expenses versus income in retirement.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.