Why You Should Treat Retirement Like a Small Business
12/02/2020
Many Boomers are "retired," but those in the know don't think of it that way. Instead, they treat retirement as if it is a small business they run. Doing so is something Boomers either learn from running a business previously or from meeting with a financial adviser. Either way, it makes a lot of sense to treat retirement like a business. Here are some of the ways it will make a difference:
- Manage income and expenses in retirement, just like a small business.
Retirement income may be fixed (such as a monthly Social Security benefit) or variable (such as a Required Minimum Distribution from an IRA, or interest from investments). It is important to know how much income you receive on a monthly and annual basis and from which sources so you can support your lifestyle. Expenses should be itemized and managed monthly or quarterly so you know when bills are due and where you are spending your money. This will also be helpful in managing cash flow. - Do a projected budget each year.
Owners of well-managed small businesses project their income and expenses annually (or sometimes more often) in the form of an operating budget. This is just as valuable an exercise for retirees. Projecting income and expenses for the next year based on current and previous years is a valuable lesson in fiscal responsibility. It allows you to compare income and expenses from one year to the next, look back historically at how income and expenses have changed, make necessary adjustments to the current year and make reasonable estimates of how much money is coming in and flowing out for the year. - Analyze expenses carefully.
Wise business owners assess each and every expense category to determine where they can operate more efficiently. In retirement, you can do the same thing. Make your own list of expense categories and examine each one individually as part of your overall budget. Your mandatory expenses (rent, utilities, etc.) should be separated from discretionary expenses. If you use the above-mentioned budgeting process, you can start to hone in on expense categories that can be reduced or perhaps even eliminated. - Build in contingencies.
Experienced business owners realize that there could be unanticipated losses of income or unexpected expenses. The conservative way to plan for this is to build contingencies into a budget. In retirement, that means ensuring that you have adequate savings, an emergency fund or other financial vehicles such as equity lines available so you'll be prepared for something out of the ordinary. One of the largest expense areas in retirement tends to be health costs, so be sure to allocate contingency money for unanticipated medical needs.
These are just a few examples of ways in which you can treat retirement like a small business. If you've done any kind of personal budgeting, you're already off to a good start. Most of what I've described here can easily be done with spreadsheet software. It just takes a bit of time and financial discipline. If you are unfamiliar with basic accounting, there are plenty of sources available via a simple internet search. Numerous personal finance apps could be of assistance, and your financial adviser could also provide valuable guidance.
The end of the year is an ideal time to think ahead and set up a simple system so you can treat your retirement like a small business in 2021.
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