Day of (Budget) Reckoning

With the start of 2010, we tackled the task of analyzing our 2009 expenses. I think we were both a little concerned about how well we had stayed within our budget, since we weren’t disciplined enough to track expenses month by month. I’m sure we will address this monthly from now on, because it took Ron several days to work on the whole year at once. Some electronic records are unspecific, and as time goes by, the memory fades. But Ron was tenacious, digging through all the details a month at a time, categorizing expenses into our pre-defined categories.

Before I tell you about the results, I should explain that for the purpose of modeling and analysis, we actually have four budgets with different levels of discretionary spending. Our Extravagant budget allows a generous level of discretionary spending, especially in the Entertainment and Travel categories. On the other extreme of the scale, the Low budget cuts discretionary expenses to the bare minimum. The Low budget is about 40% below Extravagant. In between, are High and Average budgets. These variations allow us to employ the appropriate annual budget based on economic conditions and/or other external factors.

We closed 2009 with our expenses about 3% under the High budget. We are very satisfied with this result, because we admit that we lived large last year while acclimating to retired life. Our expectation was that we would be closer to the Extravagant level. At the expense category level, we had just a few anomalies. Our Food expenses were slightly above budget, because we cooked at home more (better for our diet and keeping our Dining expenses well within budget). Housing ran above budget due to the cost of refinancing our mortgage last year, and monthly parking jumped from $180 to $225. (Ongoing, our mortgage payment drops $200 per month.) Transportation expenses were much lower than budgeted, as we replaced most auto usage with public transportation. Utilities came in about 50% under budget, probably because we had a really mild summer and we hardly had to use air conditioning at all. I am proud that I stayed well within my Clothing budget. The truth is that I am now happy to live in t-shirts or sweaters and jeans 90% of the time.

FYI, the big Mediterranean cruise was covered under our Capital budget – not included in expenses.

This year, we’ll do our analysis monthly, to give us a chance to make budget and/or spending adjustments throughout the year. It really gives us confidence in our retirement plans to have this data and analysis to validate our long term financials.

Lifestyle Changes During Retirement

Ron and I think about our retirement years in several phases. This is helpful for planning and budgeting purposes. Each phase is a lifestyle change, but the transition between these stages will likely be gradual. You may have fewer or more phases, and they will be defined by your personal situation, wants and needs.

First, there are the “Early Retirement” years. Regardless of when you retire, this is a period of euphoria, recovery, and adjustment. You are redefining who you are and how you spend your time. Interested in doing all the things you didn’t have time to do before, you can now make time for regular exercise, reading, healthy and leisurely meals, pleasure travel – whatever makes you happy. To stay engaged, you may still want to do a little part time work (volunteer or paid) in a field that interests you. Your health is hopefully still pretty good, so you can be involved in activities you enjoy. Your budget will most likely be higher than in later years.

Next come the “Middle Retirement” years. Been there, done that, and you will be more ready to settle down. You will probably living in the last home you will own, in the locale of your choice, near friends and/or family. Less active and mobile now, you’ll have routines and pastimes that keep you closer to the comfort of home. There may be medical issues to manage, and having health care professionals you know and trust becomes a priority. Your budget settles down too, and expenses are easily projected. Life will be simpler, and your spending will reflect a desire to keep it so.

The “Late Retirement” years are the most difficult to think about. Inevitably, they are associated with old age and end of life. The worst thing we can think of is being incapacitated and unable to care for ourselves – especially if we don’t have the financial means to obtain managed care. (Me; I’m aiming for the end coming suddenly on a beautiful day on the golf course – but I don’t think I get that choice.) Our plan and budget includes selling a home and liquidating other assets to move into some sort of assisted living facility together. We are hoping that the aging of the Baby Boomers continues to drive the establishment of more, and more attractive, assisted living options to help us gracefully approach the end of our lives.

Your retirement plan and budget will need to address the phases of retirement you foresee, and the lifestyle associated with each. Hone your dreams to account for the eventual changes coming in your lives.

Where Does Your Hard-Earned Money Go?

Most people don’t find budgeting exactly fun. It is, however, critical to expense control and your retirement planning. But where to begin?

We started with an analysis of our spending habits. Ron downloaded months-worth of spending data from our bank’s web site and American Express. He then grouped like expenses together and determined what category names to put on the groupings. Then we started tracking our spending in those categories. You need to do this too, as a precursor to establishing your budget. I guarantee you will become more aware of where your money is going – and in the process will make some surprising discoveries.

Although some of your category buckets will be the same as ours, you will have others we don’t have, and/or may want to track at a lower level of granularity. The categories we use are listed below in alpha order with a little on what they include, where necessary:

· Allowance – Walking around pocket money.
· Books/Magazines
· Car Insurance
· Car/Transportation – Gas, maintenance, and for us city-folk, public transportation.
· Charity – Including church donation or tithe.
· Clothes – Plus shoes and accessories.
· Dry Cleaning
· Entertainment – Dining out, movies, concerts, theater, clubbing.
· Food – Groceries (does not include dining out).
· Gifts
· Grooming – Haircuts, coloring, manicures, pedicures.
· Gym Membership – May also include exercise and dance classes.
· Health Care
· House Cleaning
· Household Goods
· Housing – Mortgage principle & interest or rent, property tax, parking, homeowner or renters insurance, association assessment, home repairs.
· Internet
· Miscellaneous – There’s always something that defies categorization.
· Savings – Money that comes out of your pay and goes directly into a bank account, a 401K, investments, or deferred compensation.
· Telephone – Land line, cell phone (include cell internet service).
· Travel/Vacation – Air travel, hotel, meals, other spending on vacation.
· TV – Cable, DirecTV.
· Utilities – Water, electric, gas, trash collection (be sure you know whether any of these are already included in association assessment fees).
· Wine – Wine and other alcoholic beverages could be included with groceries, but we like to track it separately.

Again, these are our categories and may not work for you. You may have child or adult care, tuition, alimony, debt repayment (loans or credit cards), lawn care, legal fees, or other expenses pertinent to your life.

Start evaluating your spending today. It’s a necessary step before establishing your pre-retirement budget, which will be next week’s subject.