3 Reasons To Focus On Expenses When Planning For Retirement
Posted on: 31 August 2019
For most Americans, trying to figure out what their retirement savings goal should be is a constant struggle. You have many choices for how to calculate your target numbers — based on percentages of your current income, withdrawal rates, and inflation figures, just to name a few. With so many variables and nearly endless advice, those who are already daunted by retirement calculations may find themselves lost.
Rather than let yourself be turned off from the attempt to find a retirement target, though, consider the value of focusing on your expenses rather than your income. Why does the method offer better planning success? Here are a few reasons.
Expenses Are What Matters
Retirement calculations based on your current income may lead to misleading numbers. Most Americans don't spend exactly what they earn on living costs. With the advance of credit, they may, in fact, be living on more than what they actually earn. On the other hand, good savers may not spend nearly as much as they take in. In both situations, earnings don't tell the true story of what you need to survive and thrive.
Analyzing your expenses, though, gives you not only a better idea what it takes to live now but also what you will and won't pay for when you stop working.
Inflation Is Easier to Forecast
Inflation — the increase in what items cost each year — is a necessary factor for good retirement planning. This is especially true if you have more than a decade or so before retirement age. Recent decades have seen an average inflation rate of about 3% annually, meaning that your expenses are likely to rise about that much each year.
Figuring inflation at a standard average makes it easier to know how much in additional funds you'll spend during retirement. If you work from an income standpoint, you'll have to figure in raises, new jobs, promotions, and layoffs into your income — which will be much harder to nail down. Even the most simple retirement calculator can include an average amount for inflation.
Expenses Can Be Altered
Not everyone can change their annual income, but most people have more control over their expenses. If you have a higher cost of living, for instance, you could move to a less expensive region during retirement.
You can often downsize unnecessary expenses like entertainment costs, clothing budgets, eating out, or spending on grandchildren. Or, if you reduce certain work-related expenses during retirement, you can increase fun and travel budgets. There is more wiggle room to tailor your retirement expenses to your own personality and situation if you stay focused on them as a guide.
Clearly, calculating retirement numbers is complicated. But if you stay focused on working with your expenses rather than being sidetracked by current earnings, you're sure to have a more successful effort.
For more information, contact companies like Pralana Consulting LLC.
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