If you\u2019re 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\u2019ll live a \u201clong and robust\u201d life, and so your living expenses will have by far the biggest impact on the success rate of your plan.<\/p>\n
But for some people, the word \u201cbudget\u201d creates negative feelings of an externally-imposed constraint \u2013 someone is telling you what you can and cannot spend.<\/p>\n
Is there a better, more positive way to look at this?<\/p>\n
Well, you could think about it like this:<\/p>\n
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 \u2013 as accurately as possible \u2013 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\u2019t change much from year to year, and we refer to these as your \u201ccore\u201d living expenses.<\/p>\n
Note that we didn\u2019t include health care costs in the \u201ccore\u201d expense list. Why not? Well, we\u2019ve 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.<\/p>\n
Once you\u2019ve come up with an accurate figure for your core living expenses, you can turn to discretionary \u2013 or, as we call them at Springwater \u2013 “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\u2019t occur every year, and you probably have flexibility around the timing. If they are recurring, you likely have some leeway in the amount you\u2019ll spend.<\/p>\n
So, you\u2019ve come up with your income need in retirement (your \u201ccore\u201d living expenses), and also your wish list for discretionary, or variable, expenses. It\u2019s now time to consult with your advisor to assess the strength of your plan, and to \u201cstress test\u201d 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.<\/p>\n
So, instead of thinking of a budget as a limit or cap on what you\u2019ll 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\u2019ll need to cover your core living expenses in retirement, you can give yourself a much clearer picture of what\u2019s available for all the \u201cfun\u201d stuff.<\/p>\n