Spending Freeze: stopping all spending during a specific timeframe.
Two of the most popular questions pre-retirees ask when they are considering retirement are:
Do I have enough money to retire?
How much do I need to retire?
While these questions are important to answer, they are impossible to answer without first understanding the other side of that equation. That is – how much money are you going to spend in retirement?
In order to know how much money you need to retire, you need to know how much money you will spend each month and year. A lot of factors go into that spending calculation and because of this, people tend to become disheartened. They aren’t sure how to answer the question.
A good place to start determining your retirement income need is by determining your baseline income need. The baseline is what is needed to keep your basic life expenses covered. It’s the amount of money you need to spend to “keep the lights on.”
The problem for many is that they simply don’t know what amount of money it takes to keep the lights on during retirement.
Baseline income takes into account all the expenses that can not be neglected. And this is where the frustration starts. Many will get caught up with the belief that they don’t know what the baseline needs during retirement are because they have never been retired before. However, this is usually an excuse and a tactic to avoid doing a very basic budget of key expenses. Your baseline income need in retirement is going to be very similar to your baseline income need before retirement.
Traditional budgeting templates are usually quite helpful and enough for people to determine their baseline income need. However, traditional budgeting doesn’t work for everyone. If there is still resistance or confusion about what makes up baseline income, it might be time to try a spending freeze.
A spending freeze is simply a complete stoppage of spending for a set period of time. For those trying to develop a retirement income plan, a one week spending freeze is a good place to start. How does it work?
During a spending freeze, no spending is allowed on anything without documentation. A person in a spending freeze must not spend any money on any item or service. If the person is at a point where they feel they MUST spend money during a freeze (for example, to fill up the car with gas), then that purchase is documented. The goal is to become aware of where money is being spent, how much is needed vs. wanted, and to begin documenting expenses. After one week, all of the documented expenses are reviewed and categorized. If completed correctly, this tactic helps determine the baseline income need.
The documented expenses during a spending freeze can then be added to a traditional budgeting template. These templates will include the critical expenses that may not appear during a spending freeze such as insurance, mortgage/rent, and taxes.
A spending freeze is very similar to a no-spend challenge, or an extended spending fast that is part of an Intermittent Spending strategy. For more on this, check out this blog post on Intermittent Spending.
A spending freeze for pre-retirees was the main focus of a Dolphin Financial show. You can listen to that podcast below.
Spending Freeze for Retirees Key Points:
Retirees need to know their baseline income need
Uses a set time of not spending to determine baseline income
Critical expenses during a spending freeze are documented
Spending freeze documentation added to a broader budgeting template
Goal is to become mindful or more aware of expenses
Great for those who have never created a budget or don’t want to engage in traditional budgeting tactics.
A Spending Freeze is a great tactic for pre-retirees to jumpstart their retirement plans. It is a quick (although not painless) way for people to get a clear understanding of their spending needs and expenses. The purpose is to identify a baseline income need. This baseline income is critical for developing a retirement income plan. A spending freeze is not a traditional means of determining an income need, but it is different and disruptive enough to be effective for the right type of person.
Daniel J. Wendol is the owner of the Dolphin Financial Group. He is a CERTIFIED FINANCIAL PLANNER™, licensed as an Investment Advisor Representative, and also has an insurance license. He combines the investing and insurance worlds with a focus on retirement. ‘
Each week Dan hosts Dolphin Financial Radio, a podcast about the wide-ranging issues people face leading up to and through retirement.
Dolphin Financial Group acts in a fiduciary capacity to help people make life’s toughest financial decisions.