By Ben Messinger

For many of us, retirement funding is a

central fixture of our financial plan and one of the most important

considerations is determining the income necessary to sustain a desired

lifestyle.

Knowing the true income need for your

lifestyle is the foundation of determining what capital resources must be

acquired, which is then used to determine a savings and accumulation plan. It

all starts with knowing “lifestyle income need.”

Lifestyle income need is your financial

plan’s point of origin. “For every complex problem there is an answer that is

clear, simple and wrong,” said H.L. Mencken, a cultural critic.

I’ve learned over the years that many

clients can easily answer the question, “How much have you spent per month on

average, over the past year?”

Unfortunately, that answer is often

wrong. It’s not their fault – it’s human nature to underestimate our spending.

In fact, every time I make a purchase, I find myself surprised by the total.

Recently I mailed a one-pound package and

bought a roll of stamps. The total for this purchase came to $66! Scale that

experience all the way up to encompass our total household expenses, and it’s

easy to see why we typically underestimate just how much our lifestyle actually

costs.

Often when someone makes an effort to

estimate income need, they begin at the wrong end of the equation by attempting

to itemize expense categories.

Without accounting for the unexpected,

this process is not only tedious, it’s doomed to fail.

The following is a very simple exercise

to estimate income need for your current lifestyle.

Step 1 is to identify your total bank account

balances at both the beginning and end of last year.

Next, total up all deposits – any income

you put into your bank account(s) – be it from paychecks, the boat you sold,

etc.

Now we’ll apply simple arithmetic to

learn some important things about your lifestyle.

Take your ending bank balance and

subtract your beginning balance. We will call this your balance change.

Is the number positive or negative? If

the number is positive, you lived within your means.

If it is negative, you spent more last

year than you earned.

Was last year an unusual year? Was there

a large, planned expense you saved up for over several years? Were there any

large, unusual expenses?

Now take the sum of all your deposits –

what we will call take-home income – and subtract your balance change. The

result should represent the amount of money you actually spent during the year.

This is an important number because it

represents the cost of funding your current lifestyle. No need to itemize. Last

year you did all the things you usually do, and that’s how much it cost.

Now there are just a few minor

adjustments to make.

If you have any major expenses today

which you do not plan to have in retirement, back them out. For example, if you

have a mortgage today that you will not have in retirement, subtract the

principle and interest portion, leaving the taxes and insurance portion.

Additionally, if you expect any new major

expenses in retirement, add them.

You now have a baseline number to begin

your retirement planning.

Why is this number so useful for

retirement planning?

The answer is simple: your current

lifestyle is the best proxy you have for your future lifestyle. People often

anticipate a different retirement lifestyle with less spending. I don’t believe

this is a prudent way to plan.

When you retire you will be the same

person you are today, and the lifestyle you are comfortable with now is the

same lifestyle you will likely want to continue.

With a good income-need estimate in hand,

you are now ready to begin the process of identifying the capital resources

necessary to provide that income when you commence retirement. But it all

begins with an honest and accurate evaluation of your current lifestyle

expenses.

Ben Messinger is a certified financial planner

and financial advisor with HFG Trust in Kennewick.