Why expense tracking is important if you want to retire earlier

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Creating a budget or spending plan can sometimes get a bad reputation for being too restrictive. Granted, budgets aren’t universal, and using the wrong method for your situation can lead to feelings of exhaustion and limitation. However, there’s a huge benefit to tracking how much of your money is being spent, especially if you’re hoping to retire at age 65 or earlier.

Tracking your expenses is one of the most important steps in determining your “retirement number” (i.e. how much money you need to have saved or invested before you can retire). Indeed, once you retire, you’ll need to know how much money you should be spending each year to ensure that your savings and investments will keep you afloat for the rest of your life.

Remember, the idea is that once you retire, you won’t be working, so any money you invest can be withdrawn each year and used as ‘income’.

The amount of money you take out each year will be different for everyone and will depend on a number of factors such as where you live, how much you pay in rent or mortgage and the type of lifestyle you want. to have. retired. Traveling several times a year will mean spending more money than spending time in your own backyard doing some inexpensive hobby or volunteer work.

You can look at your current lifestyle and interests — and therefore your current spending level — to get clues about how much money you’re likely to spend each year in retirement. For example, if you travel a lot now and want to continue traveling in retirement, this should be taken into consideration.

Keep in mind that your current level of spending probably won’t be a exact are the amount you will spend during your golden years, since some costs will likely be lower or higher in retirement. For example, you might spend more on health care later than you do now. However, your housing costs may be lower in retirement than they are now if you plan to pay off your house by then. Nevertheless, your current expenses can be a good starting point.

If you have already established a budget, simply refer to the budget for each month. Look at your total expenses for each month and add up all the numbers – then you’ll see exactly how much money you’ve spent in a year. But if you haven’t budgeted or tracked your spending yet, you’ll want to skim through your bank statements and start adding up the numbers. This can quite frankly be time-consuming and frustrating, so using a budgeting app like Mint or software like YNAB (You Need A Budget) will streamline the process. These apps connect to your bank account and/or credit card to track and categorize each transaction, giving you a monthly total for exactly how much you’ve spent.

Now that you know how much money you are currently spending, you may want to adjust the amount based on what you expect to be spending in retirement. Don’t forget to factor in travel if you think you’ll be on the road often, and other expensive experiences or events if you think they’ll play a big part in how you spend your time in the future. .

Once you have a rough estimate of what you will spend each year, you should consider how much money you will receive in retirement benefits like Social Security. For 2022, the average benefit amount for a retired worker will be approximately $1,658 per month. That means retirees this year are expected to receive an average of nearly $20,000 in Social Security income, about $20,000 less than they are expected to withdraw from their own retirement savings.

After subtracting Social Security income from your total expenses, you’ll get the amount of money you’ll need to withdraw each year from your own savings. Once you have that number, you can use the 4% rule to calculate the grand total of how much you should be saving before you retire.

The 4% rule states that you should be able to live comfortably on 4% of your money in investments in your first year of retirement, then increase or decrease that amount slightly to account for inflation each year thereafter. Based on historical data, living with only 4% allow you to use your retirement portfolio to cover your expenses for 30 years.

If you plan to retire early, you may want to adjust the percentage or increase your savings with additional money, as you will need more to last beyond 30 years.

Let’s say you decide to work with 4% as the amount you will withdraw in your first year of retirement. You will simply take the number you calculated for your annual retirement expenses and divide it by 0.04 (or multiply it by 25) and the number you get is your retirement number. In other words, it’s the amount of money you’ll need before you can retire comfortably and safely.

Without tracking your spending first, it’s hard to get an idea of ​​how big (or big) an end goal you’re aiming for is.

Apps like Personal Capital can help you track and analyze your expenses, as well as predict how much money you’ll have in retirement with its retirement planning tool. You can connect your bank account, credit cards, and investment accounts to the program to track your net worth, expenses, investments, and more.

Personal capital

On the Personal Capital secure site

  • Cost

    The app is free, but users have the option to add investment management services for 0.89% of their money (for accounts under $1 million)

  • Standout Features

    A budgeting app and investing tool that tracks both your spending and your wealth

  • Categorize your expenses

    Yes, but users can modify

  • Links to accounts

    Yes, bank cards and credit cards, as well as IRAs, 401(k)s, mortgages and loans

  • Availablity

    Available in the App Store (for iOS) and Google Play (for Android)

  • Security functions

    Data encryption, fraud protection and strong user authentication

At the end of the line

Tracking your spending is such an important step when saving for retirement because it’s hard to create a goal for your retirement number if you don’t even know where you are right now. Knowing how much you’re spending right now can provide clues to how much money you’re likely to need each year in retirement – you can then use this information to work out how much money you’ll need to save in total before entering. retirement.

This is particularly important if you want to retire early, as you will need to ensure that the money you save and invest will be enough to last beyond 30 years.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.

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