I am excited to report that my wife and I have completed the first full year of our spending plan. Our goal was to understand and manage our expenses. The result of this has been a year of learning and surprises for us.
Our first step in managing our retirement finances was to do financial projections – how long would our money last, based on how much money we planned to spend. The question we answered was the amount of money we could take out of our investments and still have enough for the rest of our lives.
Now it was time to start tracking how we were doing. We chose to start a quarter year before I “retired.” I knew that we would be moving into a new phase of our life. Instead of living off our incomes from work, our income would come primarily from Social Security, pensions, and savings.
We found this quarterly-review process to be extremely helpful for many reasons, some unexpected.
- We learned a lot about where our money was going. As a result, we decided to decrease some expenses and increase others. Those decisions improved the quality of our lives.
- By working on this together as a couple, we ended up on the same page – with a common understanding and plan.
- When unexpected opportunities (expenses) presented themselves during the year, we were able to consider them more intelligently. We changed the question from “Can we afford to do it” to “How can we do it through postponing some other expenses.”
- What we learned gave us a sense of power and control over our lives. This turned out to be helpful in the time of the pandemic.
- We had already done projections about how long our money would last. We were able to see that we continue to be on track – our money should last longer than we do. That understanding took some of the edge off the question – will we have enough for the rest of our lives.
Even before we started, we knew that tracking expenses was going to be a lot of work. The first step in our process to get a handle on our money was to develop the categories of our expenses. Some expenses were predictable and frequent, such as groceries and rent. Car insurance happened predictably but only once or twice each year. Many expenses were as needed (or wanted) including travel, eating out, clothes, gifts, household expenses, etc.
Then we developed estimates for each category. We reviewed the last few years of expenses that we had been entering on Quicken, a popular money-tracking computer application. For more details on this step or if you don’t use Quicken, see Chapter 11 entitled “Enough Money for What?” in my book Serious About Retiring – see below in this email.
At the end of each quarter, after we had received our bank and credit card statements, we entered the detailed information into Quicken, downloaded the quarter’s information onto an Excel spreadsheet, sorted it, and voila we knew our expenses for the last quarter.
In each quarter there were many surprises. Some expenses turned out to be higher than expected, some lower. If we needed to figure out the source of the discrepancy, we had the details to discover where our money was really going. Was this a one-time difference from what we had expected, or not? What, if anything, did we want to do about it?
This whole process became easier to do as the year progressed. We got better at it. We have recently revised our spending plan for the next year and expect to continue this process for the foreseeable future.
I recommend that you consider having and using your own spending plan. It is one of the most fundamental steps you can take as you prepare for retirement.
Do you have to do this? No. Look at the benefits that we experienced (see above) and decide if they are important enough to you to proceed in this direction.
What are your plans to manage your money in retirement?