By Brett Fellows, CFP
A recent study by Chase Bank found that the average person misestimates the amount they spend each month by up to 35%. In other words, if someone estimates their personal spending to be $10,000 per month, it’s probably somewhere between $6,500 and $13,500. That can be a significant variance, potentially resulting in under- or over-saving for retirement by hundreds of thousands of dollars, depending on the time frame.
Indeed, estimating expenses in retirement can be challenging for anyone. As a business owner, this exercise can be even more difficult since you may have multiple sets of expenses to track. The good news is there are steps you can take to accurately track your spending and reduce the likelihood you’ll outlive your assets in retirement.
1. Distinguish Between Your Business and Personal Expenses
Many business owners intermingle their business and personal expenses. While there may be a variety of reasons for doing so, the ability to deduct expenses at tax time can make it tempting to run personal expenses through the business. Of course, this can be a beneficial strategy in the short run. However, over time, mixing personal and business expenses can be problematic.
A best practice is to have a separate account for your business income and expenses. This can be as simple as opening a business checking account or applying for a corporate credit card. By keeping your personal expenses separate, you can get a better idea of how much you spend each month and use this number to estimate your expenses in retirement.
2. Use an Expense Tracking App
Once you separate your expenses, you’ll want to implement a system to track your spending over time. Fortunately, there are a variety of budgeting and personal finance tools you can use to track your spending, so you don’t have to do it manually.
In addition, many of these tools are free, so all you have to do is connect the app to your bank account and credit cards. From there, you can set up goals, track your financial activities, and receive automatic alerts if you’re over-budget or make an abnormally large transaction.
3. Be Sure to Account for All Expenses
It may be tempting to remove the TV you purchased for your daughter’s dorm room or the trip you decided to take overseas with your family from your budget. While these may be one-time expenses, ignoring too many of them can significantly distort your spending estimate.
Likely, you’ll have a variety of one-time expenses in retirement, too. A good rule of thumb is that large expenses like trips or buying a new car occur at least every two years. As you estimate your spending in retirement, be sure to account for routine expenses as well as occasional large purchases.
4. Track Your Spending for at Least Four Years
Since expenses can vary from year to year, it’s helpful to have several years of tracking data available to estimate your spending in retirement. For example, many people saw their expenses drop at the height of the pandemic when businesses were closed, and lockdowns were enforced. As a result, the last two years may not present an accurate picture of your spending habits.
For most people, four years tends to be enough time to generate a reasonable monthly expense average. Your average spending over time will be a more useful figure as you estimate your future expenses in retirement.
5. Hold Yourself Accountable
As a business owner, you’ve probably heard the proverb, “If you want to go fast, go alone. If you want to go far, go together.” While this adage certainly applies to building a business, it can also apply to your personal finances. You don’t have to go it alone.
It’s important to have someone who can hold you accountable for your spending habits and help you make smart financial decisions. For example, your spouse, business partner, or a trusted financial advisor can help you stick to your goals, so you don’t lose sight of the outcome.
About the author: Brett Fellows, CFP®
Brett Fellows, CFP® is the founder and president of Oak Capital Advisors in Charleston, South Carolina. As a small business owner and financial planner, Brett's expert insights help entrepreneurs successfully exit their businesses and plan for a financially secure retirement.