Transition: A Spending Plan
by Stan Corey
Previously, we dealt with the loss of a paycheck due to retirement and how to set up a spreadsheet to show all of your income resources. Now it is time to set up a second spreadsheet: your spending plan. A spending plan is a useful tool for you to gain a clear understanding of where your money is going.
To start, take your income spreadsheet and break it down to show the amounts coming in on a monthly basis. If you are receiving a pension, annuity, or Social Security each month then it is easy to indicate that. For lump-sum payments from your IRA or other non-recurring income from investments, show the month it is received and then add that amount to your savings, to pull money out as needed.
Then itemize the individual expenses paid from your checking account and credit card.
Now set up your spending plan:
- Create a simple spreadsheet showing the months across the top and the list of expense categories down the side. Break down the list of expenditures into three categories: monthly recurring, non-recurring, and a separate line item showing the amount of credit card payments.
- Recurring expenses are items such as mortgage and rent; utilities (electricity, gas, oil, phone, and TV and internet); food; gasoline; life and health insurance premiums; charitable gifts; entertainment, including eating out; income tax payments; and a miscellaneous catch-all category. At the end of the list identify a total amount line to show the total of the recurring spending.
- Non-recurring expenses are items such as co-payments for doctors, dentist and eye care; various home services such as landscaping, lawn care, insect control; membership dues; annual service contract payments; life, auto, home, insurance; clothing/shoes; travel; education; gifts; charitable donations of money; maintenance on cars; and home repairs. Here again, show a total amount of non-recurring spending.
- Now make a line to show the total of both the recurring and non-recurring spending.
- Lastly, show a line item for the amount of the total monthly credit card payments. This will be an information line and not added to the other expense categories. The key is to review the credit card statements and identify the amounts being spent in the various categories listed above. If the expense does not fit into one of the categories or is not a common expense, then add the amount to the miscellaneous category above.
Once the spreadsheet is completed, you will be able to just fill in the amounts as the bills come in or do it once at the end of each month. By using the spreadsheet, you will gain a better understanding of both the amount of your income and actual living expenses. You may be spending money in areas you do not realize, or spending more in a category than you had planned.
Once you have identified all of your income and have subtracted the amount of spending each month you will either have a positive or negative number. If it is a negative number, you are likely either withdrawing from savings to make up the short fall or, worse, you are building up unsecured debt on your credit cards. On the other hand, if you have a positive number as the bottom line, you may have room to do a few more enjoyable things.
A couple of other thoughts: if you have been a saver all your life and lived within your means you may find it very difficult to now start spending what you have saved. You are also not likely to change your spending habits in retirement and will continue to be frugal. But if you have been a spender all your life you may find living on less in retirement very difficult.
Here is a simple chart I developed to help clients understand how much of their investments they can spend and still preserve their assets and keep up with inflation. The scale is a sliding scale so the amount of withdrawal increases as you age as your life expectancy is reduced.
If you are under age 60, the withdrawal rate should be less than 2 percent.
Age 60–69, withdrawal rate less than 4 percent.
Age 70–74, withdrawal rate less than 5 percent.
Age 75–79, withdrawal rate less than 6 percent.
Age 80–84, withdrawal rate less than 8 percent.
Age 85 or older, the withdrawal rate is variable depending upon needs.
Just remember, if you do not go first class, your kids will!
Photo credit by: “Transition Projects” by aimeelikestotakepics (USA) and deviantart.com.
Stan Corey has been a Certified Financial Planner Professional (CFP), Chartered Financial Consultant (ChFC), and Certified Private Wealth Advisor (CPWA) for almost 40 years. Though retired from the day-to-day activity of providing financial advisory services, he continues to consult in specialized areas as a financial fiduciary. Stan is a sought-after expert who regularly provides financial commentary at national conferences, in print and online publications, and on TV. He has a reputation for taking complex financial issues and making them understandable to the average person. He likes to say he is a “financial translator.” He has published two books: a novel, “The Divorce Dance,” in 2016, and a non-fiction work, “When Work Becomes Optional,” in 2018. Web site: www.stancorey.com.