In our game of Financing Retirement, our reduced Money In amounts aren’t likely to grow much once my beloved retires, so we’re trying to get a handle on Money Out. What are we spending now, and what will we want (or need) to continue spending on  later?

I’ve come up with a little four part process for this. Whether you’re looking at retirement or some other life change, I hope this will be helpful.

1. Get a handle on the status quo. If you use personal financial software like Quicken®, you may know exactly where you’re spending now, since you can divide each charge. For example, you can break down that Visa charge at Kohl’s to show how much was for clothing, for accessories and for housewares. You can see exactly how much each car is costing you, and how much you spend annually on liquor or lunches out, as long as you set up the categories that way.

It’s a real eye opener! The standard software is about $60, and if you are looking at making a big change in your future, it might be worth doing this for a while first to see where your hot spots are. You can set goals, watch your investments and loan balances, and use a variety of reviews and planning models there. You can even figure out if, on balance, your old car is costing you more than a new car payment.

There is also a free basic online option for much of this at Mint.com (also by Intuit), if you’re comfortable using the cloud for this sort of thing. Either way, if you’ve never looked with a microscope at where your money goes, and you’re willing to take time to do detailed entry for a while, I guarantee you’ll see something that surprises you, positively or negatively. And no matter how you do it, it’s important to understand where your money goes now, before you can make adjustments.

2. Where can I cut back?  OK, so once you have a handle on your current expenses that you’re comfortable with, the next step is to consider what might have to change. If your new situation (we’ll use retirement as the example) will give you only 70% of your former annual income, what 30-35% of your expenses will have to go?

If you no longer commute to work, gasoline or train costs my go down, lunches out may go away, and clothing needs may be much lower (it turns out I spent a small fortune in pantyhose while I was working.)  You may stop buying books and start using the library; you may need one less car; you may want a smaller home…. you get the idea. We have decided that we need to move to somewhere smaller and less expensive to maintain, possibly in a state with a more senior-friendly economy. We will keep two cars for the time being, and for at least the next five or ten years, we still want to travel.

3. What else will I need?  We know some things can be cut back – but wait! There’s one more piece of the puzzle. Some expenses may actually go up. You may need a different kind of transportation. Housing might eventually mean assisted living. And medical care is another major item of Money Out that will go up with changing needs.

In our family, we have isolated three things as our largest anticipated expenses in our new circumstances: housing, travel, and medical expenses (including insurance.)  To some extent we can control the travel and housing costs (although we’re watching the fate of the U.S. mortgage interest tax deduction with great, well, interest.)

Medical, prescription, dental, and vision costs are another thing entirely. Our costs have been contained up until now by good insurance, subsidized by employers. Really good insurance. My various cancer treatments took a paltry amount from our own pockets. Medicare will cover much less, and supplemental coverage will cost much more, than our current plans. Our out-of-pocket expenses will likely be several times what we spend in premiums and co-pays now, if our health stays stable. If we get sick, it will be even more. I’m, just sayin’, this has to be factored in.

4. Build a cushion, even if it’s small.  Try hard to keep something aside for a rainy day –  Like a major car repair, a broken heater, an exceptional travel opportunity, etc.  If your budget is too tight, you will either add debt (another cost) or do without things that you really want or need. We are working to set up an “untouchable” fund that we would never use for normal monthly expenses. As we start planning, we’d really like to have about $25,000 to avoid having to pay back the fund too often. We’ll see if we can manage that, but we both think this is really important, regardless of the amount we settle on.

Because, you know, everything will be going along fine, then you stop to scratch your nose, and… Pop! goes the weasel.

Here are a few related posts and articles to further your thinking:

• Budgeting for Your Peace of Mind (quicken.intuit.com)
• How to Create a Budget (wellkeptwallet.com)
• Afraid You Won’t Enjoy The Same Lifestyle When You Retire? (cashnetusa.com)
• Paid in full: How to retire without debt (brighterlife.ca)
• Sizing Up the Big Question: How Much Money Do You Need To Retire? (business.time.com)
• The “I’m Never Going to Retire” Retirement Plan (thesimpledollar.com)
• There’s A $250,000 Wild Card To Consider When You Plan For Retirement (businessinsider.com)
• A Little Bit of This, A Little Bit of That (theretiringsort.com)