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I do not have a "budget" per se, yet I know what I can comfortably spend monthly and stay within my income. I never go negative but some months I have more left over than other months. As there is only myself, no one else is spending so I only have to control myself.
We have never used a budget. However, I do keep track of our asset/net worth by updating the spread sheet about once a quarter to check our investments, change investment options (find lowest cost, better funds), balance the portfolio etc.
Our financial guidelines over the years were:
1. Max out IRA, 401K with automatic monthly deductions
2. Max out on all benefits offered by the company such as discount stock purchase (we stopped buying when the discount went down from 15% to 5%), health saving accounts etc.
3. Put parts of financial windfall like bonus, profit from selling a property to college saving account.
3. Accelerated payments on mortgage as fast as possible (double monthly payments, extra payments from any financial windfalls).
4. Automatic monthly transfer from saving/checking to mutual funds certain percentage of our salaries/bonus.
5. Keep all necessary spending down to the minimum by being frugal, always looking for best deals, best offer.
6. Keep discretionary spending to be a very small percentage of our saving and use the same principal of always finding the best deals, best ROI, no impulse spending and only splurge occasionally on special events.
I did not really tally up our annual spending until the year before retirement and found that we were spending about 20% of our income.
Now that we have both retired with our earned income reduced significantly, we are still keeping the same pattern of spending using the cash saving which we had put aside. In less than 2 years, with upcoming SS benefit (my husband will collect when he turns 70) and a small pension payout (I will take it as an annuity), we will not need to spend any of our saving. When I collect SS (first spousal benefit at 66 then my own at 70), most of the extra income will go to saving again.
I think the bottom line is that if you have a spending/saving pattern or principle which works and the discipline to stick with it, there is no need for any budgeting.
We did a "pre-retirement spending analysis" and a "post-retirement spending analysis" to see what things would be like living on our retirement income. This allowed us to see that we would do much better in a lower tax/ lower COL state since the categories for those items were too high for our post retirement plan to work. Now that we have been retired for 5 years, we see that we are actually doing better than planned, despite the high cost of moving and all the stuff we had to do/buy at the new house. This last year we replaced the HVAC system and the water heater (BEFORE they died!). Our roof is new, the house doesn't need painting for a few years so we shouldn't have any big house expenses. We are able to put away something each month and are beginning to talk about postponing our plan for DH to apply for his SS, since we really don't need it yet. We don't spend to a budget, but we know our expenses monthly and intentionally live below our income.
I have kept track of my spending since 2000. I use actual categories so that I know what I spend on everything per year and what the change is YOY. I do this because inflation does not hit each category with an equal percentage increase. I have created what I call my "escrow accounts". These are savings accounts and are included in my budget. Each month I deposit money for the annual property taxes, annual life insurance premium, future home repair, future medical needs. Any money left over at the end of the month is put aside for retirement and big ticket items. The income from my business is earmarked exclusively for retirement.
Each year I export the data to a spreadsheet and give it to my CFP. From this she determines if I will have enough saved in the event my husband dies. We play around with various options from what age to purchase a SPIA/DIA to changing percentages in my investments, to what year would be best to buy my next car and at what age I should move to a CCRC, and how much I would be able to spend annually at each age and not run out of savings. The whole thing fascinates me.
Do you break out your budget for retirement planning into different types of expense? For instance, ordinary expenses, extraordinary expenses, travel, etc.? Or do you utilize an income -expense =remaining cash with all line items listed?
Did you base your costs, outside of sunk costs for living, on current levels or the difference between your assumed withdrawals minus ordinary expense?
I know this is an exercise in guessing, but wanted a feel for what worked or was more accurate?
Budget? What is that? For day to day life never use it but for planning, which is want you are asking it is a very good idea.
First I would in today's dollars. But remember your expenses can more than double during your retired life so when you are all done you have to adjust for inflation.
Make up several buckets for your budget.
Costs you have to pay each month.
Cost you can cut back a little on but are closer to cost you have to pay.
Entertainment, vacations, eating out etc. Could cut to about zero if need be
Non annual expenses such as replace a car, major home repairs etc.
You may have additional buckets such as gifts, a trip around the world etc.
Next match up your sources of income to the buckets. Hopefully Social Security, pensions, annuities will cover the first two buckets. If not then you might want to buy an annuity or invest in income producing assets.
Remember if your spouce dies social security, pension and annuity income may go down but your living expenses will not drop in half. You might want life insurance to help out here.
A good budget is necessary for the well functioning. We should try to understand, what we need and what all can avoid.
I've functioned quite well all my life without a budget. A budget may be helpful for some, but can be quite unnecessary for others. Just like some people can eat all they want without gaining weight while others need to watch what they eat. One size doesn't necessarily fit all.
Remember if your spouce dies social security, pension and annuity income may go down but your living expenses will not drop in half. You might want life insurance to help out here.
That really depends on the couple.
When my mother died in 1995, my father's expenses dropped well over half as she was the spender.
If I died tomorrow, I firmly believe that the household expenses would drop by 40% as we spend very differently and our medical and life insurance would drop by 70%.
My Dw and I both served as budget counselors, tax-preparers, and tax-plan advisers for a few years. Now that I have been retired for 15 years, we still find it helpful every 5 or 10 years to review and to keep us grounded.
For us budgeting was near required for our tax-plan. To keep all of our taxable income, under tax-sheltering, we had to maintain various spending budgets within strict parameters. That set our lifestyle habits. Good habits pay dividends.
I have known many sailors who were paying 30% of their income to taxes. Right off the top an immediate loss of 30% of their income.
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