Retirement Budget and Lifestyle Achievement: The Backwards Approach

Retirement Budget and Lifestyle Achievement: The Backwards Approach

Not a day goes by that I don’t ponder my own retirement and lifestyle. Like many other baby boomers, the light at the end of the tunnel is in sight and it’s a little scary.

So how does one person or a couple prepare for a financial life without a paycheck or lack of a salary/dividend as a small business owner?  Is it all about “rules of thumb” like 70 or 80 percent of pre-retirement spending? Or can you work it backwards to see what a minimal spending budget might be and then add to it until you consume your income streams and savings into your 90’s?

Backwards Approach:

  • Calculate fixed expenses like property taxes, mortgage payment or rent, insurance payments of all sorts, and other fixed payments.
  • Estimate all variable expenses like food, clothing, property maintenance, auto fuel and maintenance, pets, dues, and other monthly/quarterly/yearly commitments.
  • Are we below our income streams? Great. If not….
  • How much do we have to take out of savings?
  • How long will savings last when expenses might be going up three, four or five percent a year?
  • Do we have to cut anything out or cut back to match income streams and saving input?
  • If not, how much disposable income do we have weekly, monthly, annually?

Adding Things in Priority Sequence:  (You have to set these priorities, not me)

  • Social activities like entertainment and hobbies
  • Travel outside the local area
  • Charity donations
  • Helping family members with monetary gifts

Thinking about three phases of retirement first introduced to me by PhD researcher Wade Pfau about ten years ago, it’s important to note that life and health and mobility may change over time.  Dr. Pfau broke retirement down into three phases:

  • The Go-Go Phase
  • The Go-Slow Phase
  • The No-Go Phase

It should be obvious upon reflection that normal retirement spending trends down over time, but medical costs and care giving costs can, and usually do, rise over time.

What can the baby boomer pre-retiree do to make sure they accomplish their life goals and lifestyle?  They can discuss this with their partner and/or extended family.  They can set and cost out their priority discretionary spending.  That means adding to what we’ll call a standard three phase minimum budget and a discretionary budget based upon additional income or savings that they experience.

2019 was a good example of recognizing increased savings for most of our clients at MainStreet Financial Planning. It was not unusual to see retired clients up 30% in savings over a three-year time period even though they were in the Go-Go Phase. Time to relook at priorities included in both the standard and discretionary budgets.

It’s been exciting to see people experiencing an expanded lifestyle of travel and helping family members and social/charitable organizations in this economic climate. We love to see our clients pay it forward.

Both paying it forward and working it backwards help reduce anxiety that affects a person or a couple’s feelings about their financial situation.  Working it backwards allows you to recognize the minimum needs and expenditures to survive, and then take advantage of good health, mobility, good spending habits and planning ahead to attain the lifestyle that is not only a dream come true, but worth experiencing.

Don’t delay if you’re a pre-retiree or an early retiree without a budget or a plan. Ponder, dream, capture and discuss the lifestyle you desire by working it backwards.  You’ll be glad you did.

Other writings on this topic:

Jim Ludwick
Jim Ludwick

Jim Ludwick is the founder of MainStreet Financial Planning. His varied education and life experiences have enabled him to apply his knowledge and experience into useful solutions for personal financial problems. His writing and broadcasting activities allow him to help many more than just individual clients. He loves a microphone.

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