This is a question we ask of all our clients whether they are younger couples who are saving for college for their children and retirement, or high net worth folks who want to retire, travel, and gift to family and charity. It is a question we ask of all our clients so we can help them achieve their goals. Some folks can tell me without much thought what their annual household spending is. Most cannot.
I get quite a few of what I call “head fakes” on this question. In that first preliminary planning meeting some couples toss out a number that they think is acceptable to me, but not a real number. I go back, crunch the numbers and come back with some educated guesses. Sometimes this happens when the couple is outspending their income and forgets to tell me about the credit cards (who wants to tell their planning guy in the first meeting they have credit card debt); or the couple is spending every dollar they make except for their contributions to their 401k or other retirement accounts; or they are great savers and forgot to tell me about a couple of the investment accounts they own and are contributing money to.
So, why is it so important to get this number right? The major components of financial planning are:
Your Income: Salary, Social Security, Pension Income, Deferred Compensation, etc.
Your Living Expenses: Subtract this from your income and we will know how much of the next component you need…
Assets: What does your portfolio look like? What is the anticipated rate of return of the investments? Will your expenses not covered by your income exceed your rate of return with an unacceptable result in your retirement years?
I am sure you are starting to understand why those of us in the planning profession want to accurately quantify your numbers – there are many figures we cannot accurately quantify, like; if inflation will revert to its historical rate of 3%, or what the portfolio return will be over a 30- or 40- year retirement, or how our elected officials will impact Social Security in the future, or what large unforeseen expense is out there for our clients. All of this affects your goals for your golden years.
That is why we emphasize SPENDING with our clients. If you need an easy way to track your expenses software programs like Quicken and Mint with automatic downloads from your checking and credit card accounts will automate the process. Getting a handle on your expenses will help you answer the tough questions of; when can I retire, can I afford to pay for my children’s college, how much can I give to my favorite charity, and can I afford the new boat?
How much are you spending?
* * * * * * * * * *
Peter B. Smith is a Family Wealth Advisor at the Planning Solutions Group in Fulton, MD and is an Annapolis resident. He can be reached at 301-543-6008 or by email at email@example.com.