Retirement Planning Part I – Your Retirement Vision and Budgeting

January 26, 2015

What Does Trying to Lose Weight and Planning for Retirement Have in Common?

For many of us, shedding a few extra pounds can prove to be a challenge. What is frustrating is that most of us know how to lose weight. At the core of it, losing weight should be quite simple to do; eat less calories than you need and exercise moderately. Sounds simple enough right? So, why do so many of us fail so miserably and what does this have to do with retirement planning? As it turns out, a lot!

When it comes down to saving for retirement or losing weight, we pretty much give the same reasons for either not doing it or doing it wrong.

Reasons for Not Losing Weight

  • I eat what I can and when I can because I am always on the run
  • I am really not sure what I should eat or how often I should eat
  • I really do not think I eat that much
  • I don’t really need to exercise, I already feel healthy

Reasons for Not Saving for Retirement

  • I just invest in my company stock or one fund because I lack the time to understand my options
  • I am really not sure what I should invest in or how much I should save
  • My budget does not have room for saving
  • I don’t even have budget, so how do I know what to save?

So what do you do? Just like with anything else you want to achieve in life, you need to start with a goal or a personal vision, and create steps to get there.


Create Your Retirement Vision

There is no way to get to a destination if you do not know what that destination is. This is why you have to create a vision for yourself or what I call a retirement destination. Start creating your vision by asking yourself the following questions:

  1. At what age do I want to retire?
  2. What do I plan to do during retirement? Pursue a second career? Work part time? Travel?
  3. Where do I want to retire? Different state or smaller home?

Write your answers down so you can hold yourself accountable to your vision. If it helps, create an actual vision board with images of the type of retirement you want to achieve and put it in a place where you can see it. This will help you stay on track as you make choices and prioritize spending and saving.

Now that you have a basic vision for the future you can begin to plan for the future and it all starts with a budget.


Creating a Realistic Budget

A realistic budget is one that includes all of your expenses not just the ones you think you should have. When we work with clients and their budgets many are surprised to find that 5-15% of their budget is going to uncategorized items. You know those small cash purchases, those lattes, those unexpected gifts, or those beauty treatments you forgot to record. By not properly accounting for these purchases you may think you need $80,000 a year to live on, when in reality you may need $84,000- $92,000. After all, this is how much you are actually spending. Compound this difference over 10-20 years and you will quickly see that the retirement amount you thought you needed is not going to get you the lifestyle you wanted. It is just like counting calories. If you do not count that afternoon guilty pleasure you may think you are eating 1,200 calories but in reality you ate 1,500 calories. And then you wonder why you are not losing weight.

Just like it is easier to lose weight by reducing the number of calories you consume rather than by working out countless of hours, it is easier to save money by spending less rather than earning more. At the end of the day you just can’t out earn bad spending patterns.


Trimming the Fat Out of Your Budget

Now that you have a clear picture of your spending and may have discovered some potential black holes in your budget, it is time to trim out the fat. We are not saying to completely eliminate all fun and entertainment out of your life. Just like a diet plan, if it is too difficult and restrictive you will not follow through with it. What we are saying is that there are opportunities for improvement in every budget. Things to consider:

  • Negotiate cable and cell phone bills
  • Consider refinancing your mortgage
  • Are you paying for memberships that you are not using?
  • Set a reasonable entertainment budget
  • Can eating out expenses be reduced?
  • Spend less on coffee runs
  • Set actual budget amounts for categories such as entertainment, beauty, dining, etc.
  • Are there expenses you can reduce or eliminate altogether
  • Set a target to reduce your budget by i.e. 6% (that 6% could be going towards savings)

When trimming out the fat out of your budget it is helpful to pull out your retirement vision board to remind yourself that every dollar spent on something today may be an additional day you have to work to get to your ideal retirement.

When it comes to retirement planning if you don’t have a clear understanding of your budget there is simply no way to properly plan for your retirement. In the end, you need to know how much you are going to need to live on during your retirement years. If you don’t really have a good grasp on this amount today how are you going to ensure that you are saving enough? The last thing you want is to get close to retirement and realize that you can’t afford to retire or that retirement will not include any fun.

In our next article we will be discussing how to assess your current financial situation. Stay tuned.