Guest article provided by: Ed Morton from designedretirements.com
Ensuring that funds are available for you throughout your retirement years is a key component to any successful retirement plan. In order to do this, you must create a budget that ensures there WILL be sufficient funds. The level of expense that you set for yourself each year must have that single goal as its purpose – sufficient funds to last you for your lifetime.
Simply put, there are $ coming in, and $ going out. Out must be less than or equal to $ coming in. Simple, but not for some people. I would like to concentrate on the out portion, or BURN RATE, so you have a system to categorize your expenses and can make intelligent decisions regarding what $ you should let out the door.
Step #1 – Calculate your total income from work, social security, interest and dividends, etc.
Step #2 – Categorize your expenses into the following categories:
- Musts: Medical, housing, utilities, food
- High on the list: Transportation, clothes
- Desirables: Entertainment, meals out, gifts, furniture
- Savings and Reduce Debt
Step #3 – Calculate the % of income (Step #1 above) consumed by each expense category from Step #2 above
- Calculate the % of each major category
- Calculate the % of each item in the category, for example the % of housing within the Musts category
Step #4 – Analyze
- If your category %’s add up to more than 100%, then you must take action to reduce some expenses. This is called a “shortfall” and you must eliminate it.
- The shortfall is financed by credit card debt, which is very expensive and can lead to larger problems
- Are any of the “High on the List” or “Desirable” expense items consuming an inordinate % of your outgoing $?
- If so, develop a plan to reduce them to eliminate your shortfall and close the gap between income and expense
- Lastly, if you have a surplus, it will be reflected in the “Savings and Reduce Debt” category. This is obviously the best of all situations and allows you some freedom with your $.
By completing the exercise above, you can help minimize your burn rate and understand where your $ are going and what you have to reduce $ going out the door.
Financial security in retirement is extremely important since, without it, you will rely on others, or the government, to care for your needs. This is not a good situation, which can lead to loss of self-esteem.
Lastly, if you do feel comfortable completing the exercise above, ask someone who you trust to do it with you, but be sure to have all of your documentation.