2018 Year-End Review and 2019 Budget Development-Part I

At the end of every calendar year, we encourage you to take just a little bit of the time that you might otherwise spend watching college football bowl games and devote it to reviewing your financial situation and developing your spending budget for the next year.  This year, we are going to devote two posts to this process.  In Part I, we are going to discuss year-end planning approaches in general.   In Part II, we will once again encourage you to perform an “actuarial valuation” of your assets and spending liabilities to measure how well you did in 2018 and to develop your 2019 spending budget “data points”.

What Should You Be Doing at Year End?

To read the common sense and very low-key thoughts of a Retirement Income Industry Association (RIIA) Thought Leadership award winner on year-end planning, we suggest that you read Dirk Cotton’s recent excellent post, “My Year-End Review and Planning Regime.”  

In his post, Dirk outlines his annual review of:

1. His investments 
2. This year’s expenses 
3. Next year’s spending budget, and 
4. Tax planning
   

With respect to budgeting, Dirk concludes:

• “I have learned to expect significant unplanned expenses. Those who think they can predict retirement spending are, again, overconfident.”  
• “This annual recalculation of spending risk is a basic concept. Regardless of what the 4% Rule suggests that you can spend every year of retirement, the actual "safe-spending" amount varies up and down, often significantly, depending on your market returns, unexpected expenses, marital status, and age. There is no reasonable fixed amount that you can safely spend throughout retirement from a volatile portfolio.”
  

We agree with Dirk.  We believe it is important to separately plan for non-recurring and recurring expenses.  As discussed in our post of February 4, 2018, our personal budgeting “regime” includes establishment of a “Rainy-Day” fund to be used to mitigate future financial shocks.    And of course, annual recalculation of spending budgets is what this website is all about.

We will add two additional items to Dirk’s list regarding budgeting:

• We believe it is important to involve your spouse (if you have one) in the year-end process, and  
• We believe it is important to perform some “what if” scenario testing to assess your risks in the event your budgeting assumptions turn out to be inaccurate.
  

We discussed both of these items in our post of September 16, 2018.