Saturday, October 17, 2015

All About that Budget

If I had to pick a theme song for this website, I guess I would have to consider Meghan Trainor’s popular song with a small modification.  While Meghan sings, “Because you know I’m all about that bass”, this website is all about a different “B” word—“Budget.”   Yes, the primary purpose of this website is to help retirees develop a reasonable spending budget.    Pretty much this entire website is devoted to this task; a task that a lot of retirees don’t even bother with, or if they do bother with it, they frequently ignore it when it comes to making spending decisions.   Does the fact that a lot of retirees don’t develop a budget or ignore their budget bother me?  Not particularly.  Unlike many experts who think that most retirees aren’t smart enough or motivated enough to manage their own money, I believe that most retirees possess the necessary skills to successfully manage their finances in retirement, much like they successfully managed their finances when they were employed.  Of course, for those retirees who can afford one, a financial advisor can be very helpful in this process.   However, when push comes to shove, it is you, Mr. or Ms. Retiree, who are ultimately responsible for making the investment and spending decisions that affect your financial situation during your retirement.  If you are reading this post, I hope it is because you are interested in learning about and taking advantage of the benefits of having a reasonable spending budget. 

You won’t find anything in this website that suggests how much of your accumulated savings or other sources of retirement income you should spend each year.  As noted above, that decision is yours based on your own personal situation.  I’m not going to chastise you for spending more (or less) that the budget amount you may develop using the Actuarial Approach.  In fact, it would be unusual if you did spend exactly the amount that you budgeted each year.  However, one of the primary benefits of developing a spending budget is to help you make your spending decisions. 

You also won’t find anything in this website that suggests that you should develop a spending budget any more frequently than annually.  There may be reasons why you may wish to develop a monthly spending budget (for example if you are trying to reduce your spending), but again, I will leave that decision up to you.

While I think it is worthwhile to track actual spending for the year to compare it with the spending budget, doing so is a fair amount of work that may not provide a lot of value to you.  There are software programs that can help you with this task, but again, tracking actual spending can be time-consuming and it is not necessary to keep your budgeting on track.  Under the Actuarial Approach, simply comparing your actual end of year assets with your expected end of year assets will give you an indication of the total gain or loss for the year resulting from the combination of spending deviations and investment deviations.  As indicated in my September 4, 2015 post, it may make sense during the middle of a year to compare actual assets with expected end-of-year assets to see how you are doing during the year for the purpose of helping you make spending decisions for the rest of the year. 

I also think it can be worthwhile to develop separate budgets for different types of expenses.  In prior posts, I have encouraged you to develop separate budgets for such different types of expenses as essential non-medical expenses, essential medical expenses, bequest motive/end-of-life expenses, other unexpected expenses and non-essential expenses.  The reason for doing this is that you may have different goals and investment strategies for these different types of expenses that may require different approaches.

Prior posts have also indicated why I think it is important to develop a spending budget that reflects the existence of other sources of retirement income that you may have.  Most other withdrawal strategies simply provide a suggested way to “tap your savings” and fail to suggest how to develop a reasonable spending budget (or budgets). 

While not every financial expert believes that budgets are essential (especially monthly budgets), many experts do.  Here are a couple of recent articles touting some of the benefits of developing a budget. 

5 Ways to Save Money During Retirement (US News)

8 Things Not to Do in Retirement (GoBankingRates)