It is Critically Important to Make a Retirement Budget. But it is Utterly Useless.

A Retirement Budget is important because when you leave the steady income of a job you need to know how much money is coming in and how much is going out.

How do you make a retirement budget?

Make list of all expenses. Since some expenses are monthly, some are quarterly, some are annual, etc., adjust the amounts so you know on a monthly basis how much each item will cost.

Make a list of all income. Adjust it so you know on a monthly basis what is coming in.

Find the difference between the total monthly income and the total monthly expenses. If the number is positive, then you have a “positive cashflow.” If the number is negative, then you have a “negative cashflow.”

Some people write it all down to the penny, even going as far as putting all numbers on a spreadsheet, and they track it religiously. I am not that way. I know more of less how things stand, and as long as I spend less than I have coming it, I feel fine. That’s enough in my book. Follow your heart on this one.

The reason I need to make a retirement budget is to be aware if I am spending more than I have or will have by then. I want to avoid caught between expenses too high and money too low.

Now, the bad news.

Planning a retirement budget is impossible, given the state of how the world works. There are always unexpected costs. Then there are the expected but unknown costs. Namely, it is likely that costs for most things will go up. How much? Impossible to say this year how much specific items will cost next year. But you can rely on the fact that companies, organizations, and governments are at all times working (let’s call it conspiring) to raise their income at our expense.

Two examples: Healthcare and Utilities

We can all relate to the horrible condition of health care costs, even for those with insurance. Health insurance was invented to mitigate the extremes of medical costs, but insurance has now become so volatile, it become impossible to plan for future medical needs. The most one can do is get coverage, and the hope for the best. Unfortunately, hope is not a good enough plan.

Medications at $100,000 per treatment are now common. There is a new gene therapy that costs $475,000. You can expect more of these advanced treatments coming. So even if you have saved and you see in your accounts some retirement savings, and have some sort of insurance, even Medicare, it may not be enough. Do I need to expect it all to go down the healthcare drain at some point?

Where I live, the local water district has raised rates 99% in the last ten years. And the rate hikes continue.

The reality as I see it is that inflation has run about 2% or less in recent years. But faced with costs that increase substantially more than inflation puts everyone at risk. Do you know anyone who has received a 10% raise every year for ten years? Or someone whose income went up 10% a year for ten years? And even there was such a person getting that 10% raise every year for ten years, that person would be only breaking even!

The list is endless. Taxes, utility costs, food, clothing, transportation.

So why bother?
In the face of these facts alone, how can one make a budget? Why bother? The answer is, we need to get a handle on things, no matter how difficult or depressing the outlook could be. In the face of a potentially difficult world, we still need to live to the best possible extent we can.

Without an idea of how much money is coming in and how much money is going out, we are flying blind. Not a good state to be in. Since we can expect unexpected things to happen, it is best to get our house in order. Hiding our heads in the sand financially is immature, stupid, and dangerous. Without a budget, you have no idea where you are. It’s like being lost.

On the one hand, the “Utterly Useless” part of the title is terrifyingly real, on the other hand it is scarily absurd.

So, let’s be an adult about this. Know where you are. To know where you are in retirement means making a retirement budget.

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