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Laura Rowley Headshot

Retirement: Do You Know What Your Life Costs?

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I was sitting at my desk this week looking at my budget for August. It contains riveting items such as:

Power bill $275
Fall soccer league, two kids: $368
Auto Insurance, two cars: $135 (I set this aside monthly so I can pay the bill in full when it arrives and avoid fees.)
College savings for three kids: A number painfully close to my mortgage payment.

For better or worse, I know exactly what my life costs, pretty close to the penny. It's fairly easy. I track my spending with online software linked to my checking, savings, debit and credit cards. I allocate a monthly amount to each of my spending categories in virtual "envelopes." Let's say I earmark $100 in my "eating out" envelope. When our family spends $35 for lunch at the diner, I swipe my debit card and the $35 shows up in a "new transactions" folder. I click and drag it to the "eating out" envelope and it goes down by $35.

Presto! I know I have $65 left to spend on eating out. When the envelope drops to zero, we stop eating out until the next month.

There is enormous peace of mind in understanding what your life costs, because it gives you the freedom to make value-driven decisions. For instance, I value my kids' education and I love to travel, so college savings and vacations take up a disproportionate chunk of our budget. As a result, we spend a lot less in other categories. (I'm big on hand-me-downs and home-cooked meals; rarely buy furnishings or electronic gadgets; and we ditched the cable four years ago.) I also know exactly where to slash the budget if a crisis occurs, like a medical emergency (which we had earlier this year to the tune of several thousand dollars).

Unfortunately, one-third of people age 55 to 65 are unsure of how much money they need to cover basic living expenses in retirement, according to a new survey by Allianz Life Insurance Company of North America. Moreover, 43 percent say they will not focus on retirement income strategies until they are less than five years from the start of retirement. An utterly insane 16 percent plan to wait until six months to one year prior.

If you don't know what your life costs, how on earth can you figure out an income strategy? And if you don't have an income strategy, how on earth do you know how much to save for retirement?

This survey shocked me, because I started saving for retirement in my 20s. Why? I come from a family of 11 kids and got a clue early on that there wouldn't be much of an inheritance. (Especially divided 11 ways.) Moreover, I have a propensity to plan and researchers have found that personality trait actually predicts higher credit scores. And I grew up in the Midwest. I'm not sure why that matters, but we seem to be a sensible lot when it comes to money.

But it was after I had children that I really ramped up my retirement savings. Why? I want them to have the freedom to focus on building their careers and raising my grandkids someday -- not figuring out how they're going to finance my old age because I was too clueless or busy to focus on it. I recognize a lot of us have been brutalized by the economy in the last decade -- our home values and retirement plans diminished in value, jobs slashed and incomes cut. Been there, done that. But knowing what my life costs has made adjusting to new economic realities a lot more manageable.

My worry is that if baby boomers who have the capacity to adjust decide they can't be bothered, we will be looking at generational warfare on an epic scale down the road. As Teresa Ghilarducci, a professor of economics at the New School for Social Research, noted in The New York Times last weekend: "...almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day."

In two decades, nearly one in five Americans will be 65 or older. With federal entitlement programs already strained, where will the resources come for those who can't afford to eat?

And while I absolutely plan to keep writing in retirement, I'm not relying on it to pay the bills. Unfortunately, 30 percent of the people surveyed by Allianz said their income plan depends on part-time work. But that's a huge risk: A survey by the Employee Benefit Research Institute found half of workers retired earlier than they planned because of their health status, the health status of a family member or a lack of job opportunities.

I know that America is a shop-till-you-drop culture. Our own government can't balance its own checkbook. But choose to ignore the culture. Track what's coming in and going out. Live within your means and set aside what you can -- more when times are good, and less when times are tough. But set aside something, and take the time to learn how to invest wisely.

Someday, your children will thank you.

Do you use a budgeting tool? Which one and why?