Before You Do Any Retirement Planning, You Must First Do a Budget


You can save all you want for retirement, and you can have the best-laid spending plan. But if you don’t start out with a budget, it may be all for nothing.

Pulling together a list of your income and expenditures is crucial, financial professionals say, especially in retirement. In fact, many professionals say that’s the first thing they ask clients to do when they come into their offices to discuss their impending retirements.

“I am a huge proponent of the budget,” says Jeremy Keating, financial advisor at Capital Income Advisors in San Diego. “I’ve been doing this for 16 years, and the number one issue, by far and away, with any client having issues in retirement, is they didn’t adhere to a budget.

Danny Harlow, president of NW Tax & Wealth Advisory Group in Vancouver, Wash., says a budget is the most important elements in any financial plan. “We will not put together an income plan until you show us your budget,” he says. “How can we plan if you don’t know how much you need?”

Surprisingly, though, most people don’t have a budget on that first visit to begin planning for their retirement. They may think they know how much they spend every month. But many are often stunned when they actually write down what they spend.

“A lot of times people don’t have a budget because their incomes are sufficient to do what they want,” says Harlow. “Sometimes people are flabbergasted when they do a budget. They just have to track where the money goes. They see how much the spend eating out. All of a sudden the reality is there.

“That’s all part of retirement planning – knowing what you need, and then seeing what you want,” he says.

We all know the things we should be doing, but that doesn’t necessarily mean we will actually do what is best for us, Keating says.

“I think it’s like saying be healthy, eat an apple a day, exercise and get good sleep,” he says. “We all know what to do. But that’s part of the reason you want a financial professional. Even the best athletes in the world have coaches. Even if you’re not held accountable to me, at least we try to keep it at the top of your mind.”

Keating says the first step is easy – just writing down what you spend. “Buy a $1 spiral notebook,” he says. “Every dollar you spend, just write it down. What you will be surprised at is how much money goes out of the door.

“I ask them how much do you spend?” he says. “I give them a budget worksheet and tell them to write it down. Invariably, you are spending 30 percent more than you thought, when you take into account insurance, gas and other stuff you bought.”

But then, the client must stick to that budget. If not, they can run into trouble very quickly.

“Not adhering to a budget is a recipe for disaster,” Keating says. “The challenge is when someone is working, they are making more than they actually need. It may be close, but they say it balances out because they are still working. When you are retired, you don’t have that luxury.”

“They spend so much time about thinking about fees associated with investments and other financial vehicles,” he says. “They do all this stuff, and then give kids $25,000 or buy a car or a camper. And pretty soon they are in trouble.”

It’s one of the important reasons to work with a financial professional, Keating says.

“You need to write it down and work with someone to hold you accountable. If we ask a question and show you a cash flow sheet, you can see the money is running out at (age) 82 if you keep on this course. It’s like getting a cancer scare. Until someone tells you, you go through hoping for the best.”

Having that conversation with a client who is overspending can be difficult, he says. “If we are bugging you about it, you need to get your spending in check,” he says.

Harlow says the entire budgeting process is hugely important. And the earlier you start, the better.

“When people are in their 50s, that’s what we try to help them do is get serious about what they want,” he says. “You can’t say I will retire in September and say you’ve got to figure out what I will do. Give us five or 10 years. When people come in, the biggest question they ask is if they can retire. We tell them retirement is not about how much money you have, it’s about how much income you need. You are not there to grow the money any more. If you haven’t grown it by the time you are 65, you are out of luck.

“It’s kind of like real estate, where it’s location, location, location,” he says. “In retirement it’s budget, budget, budget. When you know what you need, you can have what you want. If you have no debt, you have lower needs. It can make retirement more enjoyable.”

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Rodney Brooks (@perfiguy on Twitter) is the former personal finance editor and columnist for USA TODAY.