March 15, 2013

Learning To Budget All Over Again

I received the following e-mail from a regular satisfying retirement reader and commenter. Her questions and request for a post focused on budgeting are very much in line with some of the comments left on the post I wrote asking for your ideas for this blog. Except for a little editing and name changes, I've left her message intact. After reading through her concerns, see if you can add anything to my thoughts.

"Bill and I are definitely taking the next step towards retirement and we're getting our business ready to put up for sale.. a big step. Bill is pretty nervous,I am calmer about it. A big leap but we are sooo. ready. The stresses of business and the challenges of staying up to date in an ever changing industry are wearing us out! We're ready to move on to the next phase of our lives.
Reading your blog helps us both to have the large view and not be too scared. We'd feel better if our savings were still making the 7% and the 5% even that they used to, in municipal bonds. (Wouldn't everyone!?) We're having to learn more about investing. "IF" the economy had not taken a slide we probably would have retired about 2 years ago as we had originally planned.. but we're e in the same boat as everyone, with interest rates what they are. LUCKILY we did not lose in the stock market.
One thing we're going to do is sit down and remember what it is like to live on a stricter BUDGET. I wonder if you would address this issue in a blog post? How does one go from having a good bit of discretionary income to living on fixed income again? We certainly did this in our early years, but we have to relearn! Do you and Betty each get an "Allowance" monthly for personal spending? I don't spend much, monthly, but my husband does have a Home Depot habit.
We live frugally but well, but it is still a challenge to return to a stricter kind of budgeting so our retirement funds last..we are weighing that sense of FREEDOM and TIME we will gain (and better health, too, no doubt..) with the minor discomfort of having to watch pennies again. I read that the Frugal Girl and her spouse have a once a month budget meeting-- do you and Betty? Or do your retired readers?
One PLUS of doing this again in our lives (stricter budgeting) is that we are reviewing the importance and meaning of every expenditure, reviewing what kind of travel we REALLY enjoy and get our money's worth from, and just reviewing "meaning" in general-- a good thing!"
 
Besides writing most of this post for me (!), I seriously appreciate the thought Sue put into her questions and concerns. I'll take a stab at answering them. Like many, she is looking forward to retirement with a healthy mixture of edginess and excitement. With interest income almost too low to count, and the "normal" investments no longer the safe places we once thought them to be, she and Bill are refocusing on the need to choose how the monetary resources they have are best utilized.

Betty and I do not have a monthly budget meeting. We set our budget on January 1st for the coming year. It is based on last year's expenses, what we think we will need to spend, and what our income will be for the next 365 days. Also, we have a certain amount of money set aside for emergency expenses.

From then on it is my responsibility to keep things in balance. If we get some income we didn't plan on we discuss what we should do with it. If expenses are tracking higher than they should I make suggestions for cuts and adjustments and Betty gives her approval or suggests a modification here or there. I do record everything we spend in Quicken so I am never surprised by an out-of-whack expenses category. I can catch a problem very quickly.

Our total expenses have remained relatively steady over the past 12 years. How is that possible considering the effects of inflation and in areas like health care where costs have gone up a average of 15% a year? The answer is simple: they had to because my income is relatively fixed.

When I retired in 2001 at the age of 52 I had a investment/savings account designed to carry us until I planned to start taking Social Security and withdrawing from my IRA at the age of 64.  We have lived off that savings and investment account through boom and bust cycles. When those investments were making 10-15% we had extra cash flow. When our average return sunk to 3% or less, we were short. But, because we didn't spend more when times were good we had enough to carry through the tough times. A dozen years ago I had planned that the savings account would run out of money on my 64th birthday. I am going to be one month off.

Over the years we have adjusted budget categories many times. In some years we decide it is time to replace some home furnishings, so another category must be cut. In another year, maybe we decide we would rather cut back our dining out budget so we can spend a bit more somewhere else. Cable TV and the land line phone went away two years ago when we realized they weren't worth the money to us.

My clothing budget is 85% less than it was when I was working and I still have money left unspent at the end of the year. I need jeans, a T-shirt, and gym shoes. Heavens, our dry cleaning expenses for last year for both Betty and me was $36....not a month, but for all of 2012. We simply don't buy or maintain clothes than cannot be laundered.

We each get a small sum of money each month (less than $100) that doesn't have to be accounted for. Betty tends to spend hers on the grandkids or the house. I spend mine on stuff for my work with prisoners or books and blog stuff.

This post is getting a little long, so let me summarize what I believe the key to our financial stability has been:
  1. We have no consumer debt, no mortgage, no credit card debt
  2. We adjust our expenses to fit within our income, not the other way around
  3. We constantly adjust to stay on track
  4. We have learned that it doesn't take much for us to be happy

OK, your turn. What hints or tips can you give to Sue and Bill and everyone else? After all, we are all in this together.

34 comments:

  1. If Bill and Sue are still working, a good way to "practice" for retirement income is to set aside what they will have to live off monthly, and then do that for six or so months to already be in the "groove" when retired.
    I think your post is very insightful. Especially the four points you highlight. Being out of debt is such a freeing thing...especially in retirement. Talking and being willing to adjust one area to accomodate another is essential. We plan our year ahead and talk frequently about where we are. I track our spending also...that way, as you said, you can see quickly if little things are becoming big things.
    Bob, good advice!

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    1. Thanks, Linda.

      I was raised with this type of approach to spending and budgeting so it just seems natural to me. I'm always a bit surprised when folks will tell me they don't know how to budget or live within one.

      The suggestion to live off a tentative retirement budget for a period of time is an excellent one. That is a great way to test yourself and your ability to stick to a plan.

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  2. We retired early in 2004 and followed all of your four points with the excepton of a home equity loan left from financing college education for daughter and son which we paid off by 2006. We planned for our savings to last till age 95 and divided the total amount by 44 in 2004. This was our max withdrawal but we have never used the maximum. And I have now projected living to 100. So we divide the total balance by number of years left annually. Knowing this was more then adequate gives you great peace of mind. We have always been very conservative investors, great savers,used a budget and lived frugally. After paying ourselves first (savings) we projected any excess and use the money to splurge on things we wanted, new hobbies, travel, and family. Being a widow, now, not much has changed. The biggest suggestion I have for soon to be retiree is to get familiar with how you are taxed when starting Social Security. Use the Social Security Worksheet (in the 2012 1040 Instruction Booklet its on page 29) and plan traditional Ira withdrawals with a combination of withdrawals from nonIRA accounts to minimize taxes in your sixties and also to decrease the required minimum distribution(RMD) when you are 70 and a half from the traditional tax deferred IRA or 401K. Many people are not aware of the tax torpedo when they have to start taking RMD and this causes much more of their social security to become taxable. This can add a lot to your bottom line. Evaluate transferring traditional tax deferred IRA to Roth Ira when you can do it at the 15% tax bracket. Roth IRA withdrawals are not added into the Social Security worksheet. I ran the figures for when was the best time for me to start Social security and it was at the earliest date because it covered more than my fixed expenses, I got more of the social security payments without being taxed, and allows my savings to grow more. Also remember at 65 you have an increase standard deduction. Hope these tips help others to a satisfying retirement.

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    1. All excellent ideas from someone with a much deeper knowledge of financial planning than me.

      I took almost two years of money out of my IRA last year because I knew I'd have enough deductions to minimize the taxes. I ended up paying only 3% tax on that withdrawal. So this year with my first Social Security check starting in June I won't have to withdraw any IRA money and risk having some of the SS money taxed.

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    2. 3% is great, Bob. I would suggest running the social security worksheet with only half a year of Social security about $12,000, you would have one half of that($6,000) plus $26,000 of other taxable income for a total of $32,000 before social security is taxable. If you use standard deduction you have a bill of roughly $630 on total income of $44,000 or 1.43%. Even better then last year because how taxation is treated on Social security worksheet.

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  3. Good Morning. Great topic as always.
    I think the biggest clue in your response, was no debt! We have none and it is liberating and makes it much easier to budget and live on a fixed income. We also bank my husbands monthly pension and use it only as our emergency fund and for travel etc. We live off of mine. That works for us at the moment. We also sold one car. Grocery shopping is done carefully according to the sales and with a meal plan in hand. We have found like many that we have very simple needs now.
    WE do not have monthly budget meetings it seems like that would be tedious and rather stressful. We do talk about at the beginning of the year what our long range savings goals might be for any major expenditures and how we will work towards achieving those. We also try and plan any major travel plans. This year for example we will be going to Cancun and also to Colorado for a month in the summer. In order to accomplish those trips debt free we must adjust monthly allocation of funds.
    All in all we live quite comfortably on our fixed income. I guess we try and keep a more minimalist frame of mind than we did when we had double the income than we had now. The plus is we have very little stress. A great trade off. Good luck on your future retirement.

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    1. Knowing a little about the couple who submitted the question I think they will be fine. They are having very typical pre-retirement jitters.

      The one area I want to find a solution for is our grocery bill. We have simple, basic dinners but still spend much more each week at the store than advisable. We use a list, a pre-planned menu, use price-match to get the lowest prices from any store and avoid most of the pre-packaged expensive unhealthy stuff. We have left-overs twice a week and still the bill is too high.

      This is my new crusade!

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    2. I hear you Bob...what are you trying to get the amount down to? We get bountiful baskets .....it is a coop for vegetables/fruits. We spend $15 on the basket and build our meals around what we get fresh on Sat. Morning. I know they are in many Arizona areas. Give them a look see.

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    3. I think the reason for the problem is simple: Betty and I are too busy with our projects and interests to want to take the time to make more cost efficient meals for dinner. We tend to pick meals that are quick to prepare and clean up. That doesn't mean frozen dinners or hot dogs! But, it mean we will favor speed over taking the time to prepare a meal from scratch very often.

      We also throw away probably $10-$15 a week of food that has gone bad before we use it. Or, we will buy an ingredient for a recipe and then not figure out how the use the rest of that ingredient in another meal.

      I will check out the coop idea. Our local farmer's market has good quality produce but it is at least 50% more expensive than the supermarket version.

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    4. Bob, depending on your storage requirements you may want to consider the pantry principle of meny planning. In other words, I buy only the loss leaders each week (and freeze them). I buy produce, dairy products and wine weekly. You may want to check out convienience items such as a small slow cooker. Oh, and what about treating cooking as "couples time" or a social activity. I also tend to get lots of grill type stuff-

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    5. Bob, you can certainly bring down your grocery bills by preparing your meals from scratch, but from what you've detailed, it sounds like cooking may simply not be a priority in your household. I cook from scratch, and our weekly grocery bill is low accordingly, however, we budget for a housekeeper because cleaning is not a priority in our household. Different strokes, in other words. :-)

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    6. You are correct. Neither Betty or I are particularly keen on involved cooking. But, we clean well. We split the housekeeping chores and rotate them every other time. Now, if we could just budget for a cook....

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    7. Oh, to Barb's comment, we have decided to build a shopping list based on the various sales and BOG deals each week, rather that come up with a menu and then buy food based on that. I think that will save us some money.

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  4. I completely get where your poster is coming from, and felt pretty much the same way as we approached retirement. However, I really think your guest poster will be amazed at just how far the money will go once there is time to slow down, find more efficient ways to do things, and determine what their true priorities are.

    We do much of what you and Betty do, Bob. We're now in Year Three of adhering to our retirement budget, and have spent less, not more, each consecutive year. How? We have time to research the most efficient way to manage the spend on things we must purchase(insurance, utility bills, groceries) and to same for the things we enjoy (travel, hobbies, entertainment, dining out).

    In our household my husband handles the investment side, and I handle the budgeting side. We track all of our expenses in a spreadsheet, which we both can view, and do, on almost a daily basis. I deposit a years worth of funds on January 1, then draw down the funds over the course of the year. Somehow the psychology of seeing a healthy amount of $$$ in the funds remaining column motivates me to spend wisely. I also enjoy comparing results from one year to the next - it almost becomes a game to see if I can beat the system and spend less on unexciting things like home and auto insurance, electricity and gas usage, and our technology driven bills.

    Much to my surprise, I feel much wealthier on a fixed budget in retirement than I did during our "plush" working years.

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    1. Our youngest daughter has lived with us for the past 18 months as she finishes schooling to follow a new career path. She does pay a small amount of rent and it has been great having her home, but I cringe each month when I see the year-to-year comparisons on electric costs and food expenses.

      That third person tends to make our budget more of a wish than reality. Oh well, she is planning on moving out in October, Then, we'll be back to "normal" and I can do a better job of tracking what we spend.

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  5. I have a budget, but it is very high-level.

    What I do instead is every month I put the monthly amount into my checking and then I automatically move money from that into various non-monthly accounts. For instance, I have a Housing account that pays for non-monthly costs like property taxes and maintenance. I have a similar account for automobiles, travel, etc. My wife and I each have a Fun Money account as well that is added to monthly.

    Anyway, as long as none of my account drop below $0, then I'm on budget.

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    1. In my case for things like property taxes that are due twice a year I will divide the total into twelve equal monthly amounts. Of course, in April I will show a deficit in that account when I make the first payment. But, after the second payment in October and by December 31st the outgo matches the budget I am happy.

      Betty and I call our personal money WAM...walking around money. It works well.

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  6. This was an amazingly helpful post. I NEVER budgeted & was terribly inefficient with my finances while working. so I am starting from nothing as I learn to budget now. We still have a mortgage & a car payment, but are clearing them as quickly as possible. I'm paying close attention to all these tips! I do find, however, that the money does go much further as I have time to slow down & breathe.

    Thank you! This is one I'll be reading & re-reading because I'm a rookie at this.

    pam

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    1. You are so right..by just slowing down and taking the time to look closely at everything you are spending, it is much easier to put things in balance.

      A budget makes it crystal clear what your priorities are. As politicians sometimes say, you can either feed the beast or starve it. The trick to a good lifestyle is to know which categories you feed and which you starve!

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  7. I am not a "finance" person nor a great budgeter. My income in retirement is lower than expected due to my own choices. That said, I do have some thoughts that may not have been mentioned.

    1. Health care, health care, health care. If you want to retire early, how will you get it and what will it cost? What may be a managable pension could falter if you have to pay cobra, as you well know, Bob.

    2. Do your best to pay for everything you may need or want in the near future before you retire. Get the new golf clubs now, not after retirement. The same with upgrading the stove if you plan to stay in your home for the forseeable future.

    3. While attempting to live on what you believe you will make is a good trial run, it doesnt take into account expenses you will lose (college expenses, retirement savings, 401K contributions) or gain (travel expenses, those new golf clubs, clothes for a differing climate)

    4. Make sure that your retirement budget includes things that bring joy to both of you, even if this means downsizing more than you might wish in other areas. Are you willing to move to a smaller home if it means you can travel more often or further?

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    1. Thanks for the list, Barb. #4 is especially important. Living a retired life that doesn't allow for some fun and experimentation is certainly not very satisfying.

      BTW, are you in Denver yet? How is the move going?

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  8. I find both this post and the comments helpful. I have always been a budgeter (keeping track of spending and savings in a spreadsheet and sitting down every Jan. 1 for the ritual of "balancing the books" and setting up next year's budget) -- so I thought this would be easy for me. But I have been finding it surprisingly difficult to estimate my retirement expenses in advance of retirement. This week, I finally sat down and did an estimate, including budget items for special expenses like travel. I know that it will have to be adjusted once I actually retire and see what my spending is like, but I feel more secure about my ability to meet my needs now that I have done the exercise. -Jean

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    1. Adjustments happen constantly, no matter how long you have been retired. Interests and what's important to you changes, certainly the economy changes, and unforeseen emergencies can throw a monkey wrench into the best laid plans.

      But, starting the way you did will be very helpful in the long run and gives you the confidence you have noted. Good for you!

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    2. Steve in Los AngelesSat Mar 16, 12:09:00 AM MST

      I separated from my government job on February 28, 2007, and began my retirement on March 1, 2007. In October 2008, I purchased my current residence, which is a condominium in a suburb of Los Angeles. My pension is just enough to make my mortgage and condominium homeowner's association dues. The rest of my expenses are paid by money that my parents left me. That money will last me until my 65th birthday. Since August 2009, I have been working for a private company on a part-time basis. Since just after the beginning of this year, I have been working more or less on a full-time basis for the company. My net income from work goes mostly to make additional principal payments on my mortgage. At the rate I am going with paying off the loan, I should have the mortgage paid off by March 2017.

      With regard to my assets, I have two variable annuities each with guaranteed lifetime income riders with two different insurance companies. One annuity is a non-qualified annuity. The other annuity is a traditional IRA qualified annuity. (By the way, some people may say that placing an IRA inside an annuity is a stupid thing to do. In my case, I would disagree completely with that assessment as, I stated above, the annuity has a GUARANTEED LIFETIME INCOME RIDER.) I also have a Roth IRA. With my government job, I also paid into Social Security and Medicare in the same manner as anyone who worked for a private company. I plan to start Social Security at age 70.

      I am doing an excellent job with budgeting. I prepare and eat the overwhelming majority of my meals at home. I rarely drive my car. I usually get around by using public transportation. I watch all of my expenses very closely.

      I wish all of you the best of everything. Living within a budget is not easy and often requires a lot of discipline.

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    3. I'll certainly agree with your final sentence. Living within a budget isn't easy and it does require a lot of discipline. But, the payoff in less stress and a more satisfying retirement is worth it.

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  9. This post and the comments are filled with great ideas! Thanks Bob! And commenters! I always learn a lot here.

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  10. 2013 is the first year I am completely on my own (without my severance package that ran out mid year 2012, so this will be the telling year in terms of money. I'm not as organized as you and Betty, but I probably should be. I monitor my spending month to month, cutting back when I've had a uptick in spending. I should do a better job, though, of looking ahead rather than reviewing after the fact. I'm going to give this some thought about how I could go about this. I, too, use Quicken, and I know I could use the budget feature there. Time to learn something new!

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    1. Looking ahead is helpful, but as you know, always in need of revision. The best laid plans, and all that. One of our daughters uses the on-line service, Mint to help her budget and track expenses. She has found it simple and helpful.

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  11. Hi, Bob...

    It may sound like something so obvious that it does not bear saying, but the more and more that I manage to reduce our expenses, the more and more control I have over our financial future and the longevity of our stash. And so the calmer and more confident I feel about retirement.

    There's a blog that has opened my eyes bigtime regarding expense reduction and control and I strongly recommend it to anyone looking for actual, practical, step-by-step ideas on reducing expenses WITHOUT giving up lifestyle quality. The blog is MrMoneyMustache.com, and you already have it on your blog list sidebar.

    Just in the last month, by following just some of the more easily doable ideas on that blog, I have slashed my annual living expenses by thousands of dollars. I think anyone could do the same.

    Cheers...

    Alex in Virginia

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    1. I think you have mentioned before your pleasure with the information on that blog. While occasionally the author's language is a little on the crass side, his information is not. I I have not been able to find ways to save the amount of money you did, but his thoughts do reinforce much of what I practice.

      You are doing well, Alex.

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    2. Hi Bob,
      You mentioned having no land line. What do you do for internet? All the plans I've looked into require land line with the internet. I would love an option where I could cut the land line expense.
      Thank you. Enjoy your blog.
      Riz

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    3. I have Internet service without a land line. In our area the primary service provider is Cox. They offer cable TV, Internet, and land line phones. They attempt to get someone to use all three services for a "bundled" price, but that isn't a requirement. My high speed Internet is $10 a month more expensive because I don't use all three of their services.

      Are you using dial up service for your computer? In that case, then yes, a land line is required to connect with the Internet. The only other way I can think of a land line being required if the company you are dealing with is primarily a phone company that also offers Internet service. In that case, maybe they require both.

      But, in general, it is not common practice anymore to require a customer to have land line phone to use high speed Internet.

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    4. Thank you for the information, Bob. I appreciate your taking the time to write this blog and answer such questions. Unfortunately, the cable provider in my area is Comcast and they do not provide only internet service. They require at least a phone/internet bundle. But hearing your information I will press to see if they will provide internet only for a slightly higher fee.
      Riz

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    5. Century Link (the phone company formerly known as Qwest) offers Internet in our area, too. You may check with your local phone company to see if Internet is available through them. Since they are probably competing with Comcast you may get a deal.

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