When meeting with clients who are about to retire I inevitably come to the question of how much money do you need each year to live on? Very few people have an answer to that question. If you don’t know how much you need how can you ever expect to know if you are ready to retire?
Let me give you an example: if someone asked you to help budget how much gas they might need for an upcoming road trip what would you ask them? Obviously you’d ask where they are going. Now imagine they said they didn’t know. There would be no way for you to help them because you don’t know if they are driving across the country or across town.
Knowing how much you need to live on is vital to preparing for retirement. Unfortunately this means you need to budget, which is one of those things we all know we need to do but rarely gets done. Once you have a handle on your budget you can adjust for anticipated changes in retirement and move on to reviewing how adequate your savings/income will be to meet your expenses.
Here are a few ways to quickly determine your annual living expenses:
- Consider using an automated system like Mint.com or Quicken
- If you aren’t accumulating any debt consider using your net pay for the year
- Try one of the many online budget calculators (Level Calculator Library)
- Set up an Excel spreadsheet and track all purchases
Lastly, make sure to factor in any changes to your budget in retirement such as higher health insurance premiums, additional travel expenses, or higher entertainment expenses. The more accurate your estimate of annual expenses the better prepared you will be to transition into retirement.
Steven Elwell, CFP®
Partner and Vice President
Do you have a plan for retirement? Contact us online to set up a free, one-on-one consultation to learn more today.