Focusing on the Wrong Factors
Fred Amrein, Amrein Financial, Wynnewood, Penn.
Too many retirees let their estimated asset allocation and return dictate their budget.
I believe you should work backward and define your retirement lifestyle into two groups of expenses: required and incidental.
This approach better defines a person’s required rate of return and better matches an appropriate risk level/asset allocation. It also defines areas where cutbacks can be made when we have market conditions like today.
Underestimating Major Expenses
James R. Miller, CFP, Woodward Financial Advisors Inc., Chapel Hill, N.C.
Automobile: Many times folks will have their cars already paid off as they start retirement and so they forget to list a car payment in their budget (since they don’t have one right now).
Then, two years into retirement they will call and ask for $30,000 to go buy a car. The problem is they didn’t factor that into their expenses. So I always remind folks that are about to begin retirement to either assume a monthly car payment indefinitely or lump sum distribution every 7 to 8 years in retirement.
Medicare: There is a misconception that Medicare is free and all your health expenses will be paid for.
Retirees need to remember to budget the monthly Medicare expense that is deducted from their Social Security benefit plus the cost of a supplemental policy for things Medicare doesn’t cover. The total cost can easily run $200 to $300/month per person in retirement.
Overlooking Gifts to Children
Steven W. Medland, CFP, TABR Capital Management, LLC, Orange, Calif.
One of the most common budgeting errors that I come across is when clients do not account for money that they give to their adult children.
This error can be corrected by approaching the budget question from both a topdown and bottom-up perspective. A bottom-up perspective encompasses adding up all the individual monthly expenses (e.g. utilities, groceries, health insurance, etc.) to get a total.
A top-down perspective encompasses taking gross monthly income, then subtracting out taxes and monthly savings to see how much you are currently living on.
As an example, I recently sat down with prospective clients and reviewed their detailed monthly budget projections. They are still working but plan to retire in the next few years.
They used a form that we provided, and when we added up all of their projected monthly expenses, they estimated that they would spend about $2,500 per month after-tax in retirement. I pointed out that they earn about $5,000 per month now (after taxes and savings are subtracted), so their $2,500 monthly estimate seemed low.
We noted that their expenses would be reduced due to the elimination of commuting costs and becoming eligible for Medicare at age 65. However, that didn’t account for the entire difference. Upon further discussion, we found that they gift money to their children throughout the year, but they weren’t accounting for this in their estimate.
Not Following the Plan
Ted Feight, CFP, Creative Financial Design, Lansing, Mich.