Budget Review

On Friday, once I made my decision to attend a retirement seminar, I calculated a couple of different estimates of what my retirement pay would be, depending on when I retire (right now, end of  summer, etc.)  I admit I have done this on previous occasions, too, just to get an idea, even when retirement was several years in the future.  Although I don't know what my deductions will be and, therefore, my net pay, yet (I have always based my budgets on net income, after deductions), I want to get an idea of what I will receive and how well will I be able to manage on a retirement income.  Financial experts often recommend trying to live on your retirement pay for a few months (preferably 6 months to a year) prior to retirement, to get an idea of how things will be. 

I enjoy budgeting (I think I'm a closet accountant!).  For me, a budget is a spending plan.  It enables me to see where my money goes, how much I need to live on, what my expenses are, which are the non-discretionary expenses that are more or less the same amount every month (mortgage/rent, insurance, certain utilities, etc.), which are the discretionary expenses (groceries, eating out, entertainment, clothing, etc.), which of those remain constant once agreed to (cable/internet/telephone payments, for example), and which can be tweaked or, even, eliminated depending on the funds available and spending priorities.

I like to know a lot of details, so I have my budget organized by categories (such as House, Car, Utilities) with sub-categories under some (for example, under House, I have property taxes, homeowner's insurance, home maintenance, garden care; under Car, I have auto insurance, maintenance, fuel).  I have some other expenses that are more stand-alone categories (Groceries, Pet Care, Gifts, etc.)  That level of detail might be too much for some, but I always want to know how much I spend and on what.  Otherwise, if I need to adjust the spending, how will I know where to make the adjustments?

We often tend to get defensive about our spending habits, I think, especially if we feel that someone is questioning our spending priorities.  But we shouldn't have to become so defensive.  We are all individuals and our spending priorities differ.  I learned that several years ago, when I went shopping with one of my cousins (she was shopping for a dress to wear to a wedding and she asked me to come along to help her choose).  She found a lovely dress for $120.  I remember being shocked and telling my mother that I couldn't imagine paying that much for a dress, and my mother pointed out to me that I would spend $120 on books, without any qualms at all!  And she was right, of course (aren't mothers usually right?)!  But, ever since then, I've always tried to keep that in mind - our spending priorities are as different as we are!  So, I might allocate $10 in my monthly budget for clothing and $50 per month for hobbies (books, craft supplies, yarn, fabric, etc.).  Someone else might allocate $100 for clothes and $0 for hobbies, especially if their hobby is clothes shopping and they don't do any crafting, knitting, sewing, etc. 

Based on my preliminary calculations (which are very preliminary, at this point), it looks like my gross retirement pay (prior to any deductions) will be approximately 74% of my current gross pay.   If I assume 35% of that retirement pay will be taken out as deductions (taxes, insurance, etc.), it gives me a more realistic idea of what my net retirement pay might be.  Actual percentage of deductions might differ, of course, but 35% is what is being deducted from my current salary for taxes, retirement contributions, insurance, etc.  I might have less taxes and no retirement contributions, once I retire, but there might be added insurance costs, depending on what benefits I qualify for.  I'd rather be more conservative and err on the side of caution.  So, I am not taking my personal retirement savings into consideration at this time.  Just what I will receive from my employer.  I want to see if I can manage on just that. 

I am also not taking into consideration what savings there might be due to retirement - less fuel for the car due to less driving, less parking costs, etc.  I actually don't have a lot of work-related expenses apart from commuting.  No professional wardrobe costs because I no longer wear tailored suits to work, no dry cleaning costs (because I don't get any of my clothes dry cleaned), no daily coffee/purchased lunches, etc.  And whatever savings in those areas will probably be offset by increased electricity and heating costs because I'll be home more and that means using the computer, the fans, the heater, the television, the sewing machine, etc.. more! LOL!

So, assuming my expenses will be the same as they are currently, will I be able to manage on what I might receive in retirement?  According to my calculations, which are based on a number of assumptions as described above, the answer is "Yes".  Definitely yes.  Because, one of my goals when I first started budgeting, was to live on 50% of my net pay.  But, there was a mortgage to pay, child care costs for my daughter, piano lessons and dance classes, etc.  So, that goal was modified to living on 70% of my net income and, for the longest time, I managed to do that.  The only time when I couldn't manage to do so was when I was putting my daughter through university.  Once she graduated and became financially independent (except for the plane tickets for visits home, the cell phone which I pay, and the occasional gifts of coffee bought on sale, that is), I was finally able to meet  my goal of living on 50% of my net pay.

Yes, my current budget is based on less than 50% of my net pay.  In fact, I have been living on less than my estimated retirement pay, for the past couple of years and doing quite well, if I say so myself.  I guess one can say that I have been working solely for the health insurance benefits I currently receive.  I definitely needed that during my recent cancer treatment!  And that is the only thing that is keeping me from handing in my retirement application - I won't be ready to retire until I know what my benefits will be.  But, from a financial point of view, I am ready.  Yes, cost of living will go up, there maybe additional expenses depending on our health and as we age.  Things happen and there's only so much pre-planning one can do.  But, I think I will be able to meet those challenges.

If you are planning for retirement, have you tried living on what you estimate will be your retirement income, for any period of time?  If you are already retired, did you try to live on your estimated retirement income before retiring?  Was it helpful for you?