Tuesday, January 3, 2017

How Did You Do Last Year?

We encourage retirees to maintain a record of prior years’ spending budget calculations and prior years’ expenses.  This historical information can serve as additional data points to help with future spending decisions.  The information can also be useful in selecting assumptions about the future, particularly about future assumed increases in various types of expenses.  So, every year around this time, in addition to encouraging you to develop your new year’s spending budget (and saving this information), we also encourage you to take reasonable steps to compile and save useful information regarding your actual spending for the previous year.

In addition to comparing your actual spending with your spending budget for the previous year, it may be helpful to determine how much of your spending was for the following expense types:

  • essential non-health related expenses, 
  • essential health related expenses, 
  • non-essential expenses and 
  • unexpected expenses
If your history shows that you have constantly overspent your spending budget (in total or by expense type), you may be understating your spending needs when developing your budget.  Or, if your history shows that your overspending relative to your budget is increasing from year to year, this can be a signal of financial problems on the horizon.  On the other hand, a history of ever widening under-spending relative to your spending budget provides evidence that you may be too conservative with your spending.

If you don’t use the Actuarial Budget Calculator (ABC) workbook with recommended assumptions to develop your spending budget, you may want to track the difference over time between your spending budget and the budget developed under the ABC with recommended assumptions.  If your history shows a widening of the gap between your calculated spending budget and the ABC amount, you may wish to revisit how you develop your spending budget.

Do you need to track your spending exactly?  While it may be helpful to do so, particularly if you develop your spending budget as the sum of several different categories, it probably isn't necessary.  If you know all of the items in the equation below other than your spending, you can solve for the amount you spent during the year.

Regarding the other important assumptions used in developing your spending budget, you can also track how well you did on your investments vs. your assumed rate of return, and actual inflation vs. assumed inflation.  Of course, every year that you and your significant other (if you have one) survive to work on a new year's spending budget should be considered a good year.

Happy budgeting and wishing you all the best in 2017.