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Preparing your Finances for Retirement
Part 1- Pre-Retirement Planning
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Anticipating and Preparing your Finances for Retirement
(Part 1 - Pre-Retirement Planning)


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For most of us, our retirement will be far longer than we ever imagined. It is also most likely different from what we expected. But, whether it will be a "40 year vacation", or a long financial struggle cannot really be predicted. However, what we can do is, see where we are now, and how our financial resources allow us to create the retirement life we want or can afford.

Because of general financial caution, we have to prepare ourselves financially for retirement as well. This starts at any time before you retire, for at the moment, when you retire, a whole host of financial aspects of your life will normally change.



The First Steps in Assessing your Finances

The first steps will include an appraisal of what you have now. It involves, apart from some other practical considerations, in detail, knowing what financial incomes you have and what you spend. Start with ten practical questions you should answer:

Some important Questions you should ask yourself
1. I have a checking and a savings account
2. I have enough monthly (or biweekly) income to pay may bills as they fall due.
3. I know exactly how much money I spend each month and on what I spend it!
4. I pay my bills on time every month
5. I balance my bank accounts every month.
6. I plan for irregular occurring expenses and have enough money put aside to pay for those when I need to.
7. I save money on a regular basis to achieve my long term financial goals
8. I take advantage of all sources of potential income (tax credits, Medicare etc)
9. I have enough money in my accounts, to cover 3 to 6 months living expenses.
10. I keep all my financial records organized and easily accessible if ever anything happens to me.

You should be able to answer all these questions with a "YES". If not, you will have to do some work on your current financial or organizational situation. The above questions cover immediate or short term items, whereas the questions below look at the longer term.

Some of the more Long Term Questions
I use credit only for items that last longer than I have to pay for them.
I have adequate Insurance (car, house or renters, health insurance, life insurance)
I look up and review my credit report at least once a year
I calculate my net worth (assets minus my debt) twice a year
I have clearly stated, realistic and written financial goals for the future.

Some of these questions might be more difficult to answer. For instance what is "adequate insurance" or what are "realistic financial goals". Remember, this is not a test, it is just a means of helping you to determine a safe future, for you and your family. Nonetheless, the more of the questions you can answer with a yes, the better it is for you.

The next step will be, to list exactly what your income and your expenditure is. Since it is likely that both will be relatively regular for each month, write down both by months as shown below.


* * * * * *

1.1. A Simple Budgeting Process

Your monthly expenditure includes all items that he and his family require for living. We have not taken into account any income tax or similar windfalls. Use these as an additional contingency for expenditure variations.

You can make these budget tables weekly or monthly. We have, because of the page size available on the internet, made the tables only monthly. Weekly budgets are better, since it will be much easier to control. If you don't know the exact amount of a future expenditure, make a conservative "best guess". Generally in budgeting, be conservative and don't be overly optimistic with your income until you know a specific date, say for a pay increase.



For simplicity, we kept the income and expenditure pattern the same for the whole year. Some of the items such as mortgage, property tax, property insurance, utilities, phone, food, gas etc should not vary much in any case.The budget would result in a saving of $670 per month. The saved $7,370 (January to beginning of December) would be added to the savings accounts in December.
An Example of Current monthly Income and Expenditure Budget
Items January February March April May June July August Sept Oct Nov Dec Total
Opening
Balance in Checking


Add to Saving
-



-
670



-
1,340



-
2,010



-
2,680



-
3,350



-
4,020



-
4,690



-
5,360



-
6,030



-
6,700



-
7,370



7,370
-



7,370
Income *)
Salary
Wife's Income

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

5,000
1,600

60,000
19,200
Mortgage (incl., Property Tax Hazard/Home Insurance)

Gas, Electricity, Water, Garbage

Phone, Internet, Cable
980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

980
150
130


500


250

11,760
1,800
1,560


6,000


3,000

Food, Laundry,
Dry Cleaning

Entertainment***)

Health Insurance
Medical
Dentists
800


100


400

800


100


400

800


100


400

800


100


400

800


100


400

800


100


400

800


100


400

800


100


400

800


100


400

800


100


400

800


100


400

800


100


400

9,600


1,120


4,800

Car Payment **) 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 1,020 12,240
Gas and Car Repair and Insurance 350 350 350 350 350 350 350 350 350 350 350 350 4,200
Credit Card
120% of minimum
Payment

Revolving Bank Credit Line 130%
of min payment

500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
500



200
6,000



2,400
Retirement Savings Fund 200 200 200 200 200 200 200 200 200 200 200 200 2,400
Emergency Fund 150 150 150 150 150 150 150 150 150 150 150 150 1,800
House Repair Provision 100 100 100 100 100 100 100 100 100 100 100 100 1,200
Misc. 100 100 100 100 100 100 100 100 100 100 100 100 1,200
Total Expenditure 5,930 5,930 5,930 5,930 5,930 5,930 5,930 5,930 5,930 5,930 5,930 5,930 71,160
Closing Balance (Carried Forward) 670 1,340 2,010 2,680 3,350 4,020 4,690 5,360 6,030 6,700 7,370 670 670
*) Income shown here is after tax and all deduction, based on a combined gross income of $101,538 with a tax/total deduction rate of 22%
**) Two cars mid size (Camry, Altima or in similar price class) 60 months 8% on a combined loan of $ 50,000. Obviously, one could reduce this expenditure by purchasing a slightly smaller car, such as a Sentry or a Corolla or something equivalent. Hence this is a variable expense.
***)entertainment expenses are already at the minimum and are therefore assumed to not to be variable.

The above is a budget within which two people can easily live. Expenditures for new clothing are limited, and come out of the credit card or the revolving Credit line. You could naturally also use some cash, instead of the expensive credit cards. We assumed that the budget holder will pay down more than the minimum every month (120% of the minimum payment for the credit card, respectively 133% of the minimum payment for the revolving bank credit line). Remember that credit cards charge very high interest rates and you should avoid using them except for very few items.

1.2.The Savings and Emergency Funds

The two savings funds are for retirement. They are pretty minimal, but will at least add some funds. Hopefully, in some future years, the funding for future use can be increased. Obviously, the general savings can be added to the Retirement Savings.
The Savings and Retirement Account Budget
Items January February March April May June July August Sept Oct Nov Dec Total End of Year
Opening
Balance/Additions General Savings


Emergency Funds
(see below)
-



350
-



350
-



350
-



350
-



350
-



350
-



350
-



350
-



350
-



350
-



350
7,370



350
7,370



4,200
Savings for future use                          

Retirement Savings Fund


200


200


200


200


200


200


200


200


200


200


200


200


2,400
Total Cumulative Savings 550 550 550 550 550 550 550 550 550 550 550 7,920 13,970
Whenever you have a house there will be some repairs and breakdowns for which you need funding. Hopefully, you will only use part of the contingency which you accumulate. The remainder can also be added to your Retirement Savings.
The Emergency and Contingency Account Budget
Emergency Funds and Contingencies
                       
Emergency Fund 150 150 150 150 150 150 150 150 150 150 150 150 1,800
House Repair Provision 100 100 100 100 100 100 100 100 100 100 100 100 1,200
Misc. 100 100 100 100 100 100 100 100 100 100 100 100 1,200
As you make up your budget, keep in mind that while preparation is essential, remaining flexible is equally important. Health, financial or family crises may send you in a different direction than you planned. But those possibilities should not prevent you from, first establishing, and then keeping to a budget. If necessary, taking into account the new and changed circumstances that unforeseen event might trust upon you!.

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1.3. The Key Elements to give Attention to, before you Retire

We assume that you do this pre-retirement budget about one to two years before your actual retirement date. This will give you time to adjust your spending patter to the changed income level you will have after retirement.

The points you should pay special attention to are

Try to pay down all credit cards and revolving credit lines. Because interest rates are high on credit card, they should be your initial target! Unused contingency funds could, for instance be used, to pay off credit cards!
Try to pay down your mortgage, if possible by accelerating your repayments (for instance pay every two weeks instead of every month or, add $200 every month to your repayments) Watch out, that you do not have any prepayment penalties!
You might want to consider buying a smaller car, so that your car payments are reduced. At least one smaller car will reduce your car payments and your gas/maintenance bill. Your car requirements will naturally be a function of what you want to do after retirement. If you want to "hit the open road" and travel a lot, then you will still want a sizeable car.
Do as much repair, upgrade and maintenance work on your house as you can afford, before you retire. This will not only maintain and increase the value of your home, it will also reduce problems later!

This concludes your pre-retirement financial assessment. Now, you should make a plan of how you solve all the problems you have discovered during your investigation. You might not be able to solve all the problems before you retire, but make an effort and address as many issues as you can and as your finances allow.

No you can proceed to your Financial Plan when your Retirement started!


Some Books on Budgets and on Living on a Budget from amazon.com


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