What Will Your Future Budget Look Like

Posted by Ronald Carter on October 16, 2016 in finance |

Go through each expense category line by line.   Adjust your figures based on what you realistically think they will be.  Here’s a link to an example of one I made.

If they are more expensive then what they are now, don’t worry.  This is just an exercise; start it off with how you’d like it to be.

Expenses

Think about the categories that you might have in the future that you probably aren’t accounting for today.

I can think of one big one: Health care.  If you aren’t paying for your medical expenses right now because your employer is covering them, then that will probably change.  Whether or not Medicare exists in the future by the time you are able to retire early, there will more than likely be something similar to it.  So for planning purposes, feel free to work it into your numbers.

What about extra money for travel?  Now that you’re financially free, you’re probably going to want to get out there and see the world.  And your pocketbook shouldn’t hold you back from doing so!

Also, feel free to add in any extra new expenses you foresee.  For example: If you always wanted to take up golf or learn to cook, those will both be great hobbies to learn.  But they will not be free!

Do you have some sort of an idea of a monthly / annual figure?

Great!  But we’ve got further to go.

Deductions

Now we’re going to take some money off of that number you just figured out, starting with taxes.

Taxes.  We haven’t worked taxes (Federal or State) into our equations yet, and those will definitely need to be considered.

But here’s the good news: There’s a good chance that if you’re planning to retire early and live off of less money than what you earn right now, you’ll more than likely enjoy a lower effective tax rate.

Just so you know, when someone says you’re in the 25% tax bracket, you don’t calculate your taxes by simply multiplying your income by 25%.  The U.S. tax system calculates your taxes using something called a “marginal tax bracket system”.  You can see a good example of how that works at this link here.

All you have to do is take your desired annual income number, subtract away your standard deduction, a personal exemption for you and your spouse, (you can find both of those numbers here) and then you’re left with your taxable income level.

Don’t worry!  It’s not too hard to estimate them.  But it is important that you do it the proper way.

(By the way, how would you like to pay zero taxes in retirement?  Here’s a post I wrote detailing how to pull this off.)

Pensions.  Next, you can deduct away any pensions or other guaranteed income from your annual desired income amount.  Unfortunately for most people, unless you work for the state or a union that still offers them, this one won’t apply.

Social Security.  Despite what you may think, you are entitled to receive Social Security payments in the future if you have been paying into the system and meet their qualifications.  Go over to Social Security’s website and try out their free calculator to find out how much you and your spouse will qualify for.

Be mindful that after the year 2034, they only have enough funds to pay out 79 cents for every dollar you’re entitled to.  Even at this fraction, your Social Security income will be an important part of your overall retirement plan.

Please don’t quite subtract this value from your annual total yet.  Later on, I’ll have some different and creative ways we can incorporate them into our strategy.

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