If you’re a Springwater client, you know that we’re focused on helping you develop an accurate estimate of your living expenses for retirement. Why? Because we typically assume that you’ll live a “long and robust” life, and so your living expenses will have by far the biggest impact on the success rate of your plan.

But for some people, the word “budget” creates negative feelings of an externally-imposed constraint – someone is telling you what you can and cannot spend.

Is there a better, more positive way to look at this?

Well, you could think about it like this:

I want my plan to have the highest possible chance of success, while also allowing me to do the things that I want. So, the first thing I need to do is estimate – as accurately as possible – what I think my fixed expenses will be in retirement. Things like housing (mortgage and property taxes, or rent), clothing, food, transportation, and utilities. These are expenses that won’t change much from year to year, and we refer to these as your “core” living expenses.

Note that we didn’t include health care costs in the “core” expense list. Why not? Well, we’ve seen that health care costs have risen faster than the overall rate of inflation over the past several decades. So, we separate out health care spending from your core expenses, which lets us inflate those costs at a different rate.

Once you’ve come up with an accurate figure for your core living expenses, you can turn to discretionary – or, as we call them at Springwater – “variable” expenses. These are things like vacations, gifts to family, friends and charities, new cars, and periodic upgrades to your home. Typically, these expenses won’t occur every year, and you probably have flexibility around the timing. If they are recurring, you likely have some leeway in the amount you’ll spend.

So, you’ve come up with your income need in retirement (your “core” living expenses), and also your wish list for discretionary, or variable, expenses. It’s now time to consult with your advisor to assess the strength of your plan, and to “stress test” it for things that could potentially jeopardize it. At Springwater, some of the stress tests we consider are longevity, higher taxes, higher inflation, lower investment returns, and care costs later in life. If your plan is still solid after considering one or more of these challenges, you can be more confident that your retirement will be comfortable.

So, instead of thinking of a budget as a limit or cap on what you’ll be able to do in the future, and a source of worry or stress, perhaps you can think of it as the first step in planning for the ideal retirement you want. By projecting the cashflow you think you’ll need to cover your core living expenses in retirement, you can give yourself a much clearer picture of what’s available for all the “fun” stuff.

PLEASE SEE important disclosure information at www.springwaterwealth.com/blog-disclosure/.