This is the seventh article in this series on retirement. I will deal with questions 11, 12, and 13 of 32 questions that you must be able to answer before you retire.
- What is my income now?
You need to know your net, spendable income now when planning for retirement. Grab a copy of your most recent Federal tax return. Write down your total gross income on a piece of paper. Then put the following numbers below your income. Find your total tax due the IRS. Next go to your Massachusetts tax return and find your total Massachusetts tax due. Then find your W-2 wages statement(s) and determine the total amount of Social Security and Medicare dollars you paid in 2016. Last, add up all dollars you and your spouse contributed to retirement plans. Now put a minus sign on every number but your gross income and subtract. The result is what I call “what is left” for you to spend. You might have “what is left”. If your charge card balance grew by $3,000 last year add that number to “what is left”. “What is left” is what you really spent that year. Really! The number will surprise you. That number is very important in your retirement plan calculations. As you will see below, you need to know what your expenses are now in order to make an estimate of expenses in retirement.
- What are my expenses now?
We just went over this. It is the “what is left” after your calculations you did in question 11 above. You probably won’t believe this number, but it is a start. When you perform retirement calculations, I can assure you that the most important number is all those calculations will be what your expenses will be in retirement. You cannot make an intelligent guess about retirement expenses without knowing accurately and completely what your expenses are today. Take some time looking at the checkbook, the charge cards and the free cash bank withdrawals for last year. Break out all these expenses into as much detail as you can. The total has to reconcile with the “what is left” number. If you can’t make it reconcile, then your expense number is wrong. Your estimate of retirement expenses will be wrong. Retiring without good data could be a disaster.
- What will my expenses be in retirement?
If you did your homework well in questions 11 and 12, working on this question could be easy and fun. Some expenses will go away in retirement. Some may decrease. Hopefully a mortgage payment will disappear. Commuting and car expenses may go down, as well as clothing. If your current expenses contain expenses for your children, hopefully those will go away in retirement. There are other expenses that may go away or go down as well. Give it some thought.
Some expenses in retirement will hopefully become larger. I would put vacations, travel, and entertainment on this list. I would also add gifts to grandkids. Don’t make round dollar guesses as to how much you will spend. In the case of vacations or travel, do some research as to what those costs may be. That $3,000 once a year vacation guess may actually come to $5,000. Whatever you guess for gifts to kids and grandkids will be way too low! These are the kind of expenses that make retirement fun! Do your homework and get it right.
Take some time on the following expenses please. Get a good estimate of healthcare costs including deductibles, co-pays and medications. Get really good numbers on estimates of any planned repairs and improvements to your home before retirement. Carefully estimate how much you will pay for and how often you will by vehicles in retirement. This is a biggie! I almost forgot to mention weddings! And, oh yeah, be careful about those dining out expenses.
In my next article I will answer the following questions: 14. What do I do about healthcare expenses?; 15. What do I do about potentially significant nursing home costs?; and 16. What about children who are still dependent upon me?
If you have a questions for me, I can be reached at mike@McNamaraFinancial.com. I promise that I will respond. If you missed any of the previous articles in this series, they can be found at my website www.McNamaraFinancial.com
Michael J. McNamara Ph.D., CFP®
CERTIFIED FINANCIAL PLANNER™
*Any financial advice in this article is intended to be generic in nature. Readers should consult with their own financial advisors before implementing any advice or suggestions above.