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Tracking your expenses is the first step if you want to retire by 65 or sooner — here's why

You'll need to know how much money you should be spending each year to keep yourself afloat.

BartekSzewczyk | iStock | Getty Images

Creating a budget or spending plan can sometimes get a bad reputation for feeling too restrictive. Admittedly, budgets are not one-size-fits-all and using the wrong method for your circumstances can result in feeling exhausted and limited. However, there is a huge benefit to tracking how much of your money gets spent — especially if you hope to retire by age 65 or sooner.

Tracking your expenses is one of the most important steps for figuring out your "retirement number" (a.k.a., how much money you need to have saved or invested before you can enter retirement). This is because once you're retired, you'll need to know how much money you should be spending each year to ensure that your savings and investments will keep you afloat for the rest of your life.

Remember, the idea is that once you enter retirement, you won't be working so all the money you invested can be withdrawn each year and used as "income."

The amount of money you'll withdraw each year will be different for everyone, and will depend on a number of factors such as, where you live, how much you'll pay in rent or mortgage and the type of lifestyle you want to have in retirement. Traveling several times a year will mean spending more money compared to only spending time in your own backyard and taking up an inexpensive hobby or volunteer work.

You can look to your current lifestyle and interests — and thus, your current level of spending — for some clues as to about how much money you're likely to spend each year in retirement. For example, if you travel a lot now and want to keep traveling around in retirement, this should be taken into consideration.

Keep in mind that your current level of spending likely won't be an exact match for how much you'll spend in your golden years, since some costs are likely to be lower or higher in retirement. For instance, you might spend more on healthcare later on than you do now. However, maybe your housing costs will be lower in retirement than they're now if you plan to pay off your home by then. Still, though, your current expenses can be a solid starting point.

If you've already been budgeting, simply refer back to each month's budget. Look at your total spend for each month and add up all the numbers — you'll then see exactly how much money you've spent in a year. But if you haven't already been budgeting or tracking your expenses, you'll want to comb through your bank statements and start adding up the numbers. This can quite frankly be very time consuming and frustrating, so using a budgeting app like Mint or software like YNAB (You Need A Budget) will streamline the process. These apps connect to your bank account and/or credit card to track and categorize every transaction, giving you a monthly total for exactly how much you've spent.

Now that you know how much money you're currently spending, you might want to adjust the amount based on what you think you'll spend in retirement. Remember to account for traveling if you think you'll be on the road a lot, and other costly experiences or events if you think they'll play a big role in how you spend your time in the future.

Once you have a rough estimate of what you'll spend each year you should consider how much money you'll receive in retirement benefits like Social Security. For 2022, the average benefit amount for a retired worker will be about $1,658 per month. That means retirees this year should receive an average of nearly $20,000 in Social Security income — that's about $20,000 less that they'd have to withdraw from their own retirement savings.

After subtracting social security income from your total spend, you'll end up with the amount of money you'll need to withdraw each year from your own savings. Once you have this number, you can use the 4% rule to calculate a grand total for how much you should save before you enter retirement.

The 4% rule states that you should be able to comfortably live off of 4% of your money in investments in your first year of retirement, then slightly increase or decrease that amount to account for inflation each subsequent year. Based on historical data, living off of just 4% will allow you to use your retirement portfolio to cover expenses for 30 years.

If you plan to retire early, though, you might want to adjust the percentage or pad your savings with extra money since you'll need more to last beyond just 30 years.

Let's say you decide to work with 4% as the amount you'll withdraw in your first year of retirement. You'll simply take the number you calculated for your yearly retirement expenses and divide it by 0.04 (or multiply it by 25) and the number you get is your retirement number. In other words, this is how much money you'll need to have before you can comfortably and securely enter retirement.

Without tracking your expenses first, it's difficult to get an idea of how big (or small) of an end goal you're looking at.

Apps like Empower (formerly Personal Capital) can help track and analyze your spending, as well as help project how much money you'll have in retirement with its retirement planner tool. You can connect your bank account, credit cards and investment accounts to the program to track your net worth, spending, investments and more.


On Empower's secure site
  • Cost

    App is free, but users have option to add investment management services for 0.89% of their money (for accounts under $1 million)

  • Standout features

    A budgeting app and investment tool that tracks both your spending and your wealth

  • Categorizes your expenses

    Yes, but users can modify

  • Links to accounts

    Yes, bank and credit cards, as well as IRAs, 401(k)s, mortgages and loans

  • Availability

    Offered in both the App Store (for iOS) and on Google Play (for Android)

  • Security features

    Data encryption, fraud protection and strong user authentication

Terms apply.

Bottom line

Tracking your expenses is such an important step when saving for retirement because it's difficult to create a goal for your retirement number if you don't even know where you're currently at. Knowing how much you spend right now can provide clues for how much money you're likely going to need each year in retirement — then, you can use this information to figure out how much money you'll need to save in total before you enter retirement.

This is especially important if you want to retire early because you'll need to make sure the money you save and invest will be enough to last beyond 30 years.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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