By Natalie Hayes Schmook, MBA, CFP, CVA
When doing financial planning for OD clients, one of the first questions I ask them is if how much they spend on a personal basis each year. Not surprisingly, most don’t really know and start adding up their mortgage, bills, groceries and travel budget each year to estimate a number. The result is a number that is almost always too low.
Without using a tracking system like Mint.com or Every Dollar, I like to do a quick estimate of annual spending using a very simple formula that anyone can calculate for themselves.
- 12/31 pay stub from the prior year or a total of direct deposits for sole proprietorships/single member LLCs
- $ amount of additional taxes owed at tax time (or the refund received)
- Amount of annual savings that was not deducted from your pay check such as a traditional IRA or a Robinhood account, including extra payments on a home mortgage
From there, use this formula:
Net pay (from your pay stub)
– additional taxes owed (or + tax refund)
– additional savings
= Annual spending
This makes sense, right? If you’re not saving it or giving it to Uncle Sam, you’re most likely spending it. There is some cushion in this number, such as the principal portion of a mortgage payment or life insurance payments that only last to a certain age. However, generally, spending doctor’s lifestyles increase over time, so leaving these cushions in allows for an increase in lifestyle at retirement.
So what do you do with this number once you get it? Stay tuned for next month’s look at the 4% rule and how it can put ODs on the right track for retirement.
Click here to read the Money Talk August issue.