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When doing retirement planning it is important to know what your annual expenses are. I'd like to compute my expenses for 2017 but in a way that isn't tedious.

I'm thinking of doing this:

  1. Get balance of all accounts on Jan 1, 2017 -> B2017
  2. Get balance of all accounts on Jan 1, 2018 -> B2018
  3. Get return on investments (my bank provides this) -> RETURN
  4. Get wages/business income from 2017 tax return -> INCOME
  5. Get income tax (and SS etc.) paid from 2017 tax return -> TAX

Compute expenses as:

INCOME - TAX - (B2018 - B2017 - RETURN)

Would that be a reasonably accurate way to compute my expenses for 2017?

  • Should #3 have already been incorporated into #4? – CactusCake Mar 22 '18 at 18:53
  • For #4, I'm pulling only actual income and not any investment gains. I'm self-employed so it gets confusing with SEP contributions. – gaefan Mar 22 '18 at 18:59
  • It's a reasonably accurate way to compute your expenses. I do it somewhat differently. I pay all bills from an online checking account, including credit card usage (no balances carried). They provide an annual summary. Add Medicare B premium and all cash withdrawals from bank and that's my outlay. – Bob Baerker Mar 22 '18 at 19:28
  • If you have some time, how about start recording your account book for a year? Assisted by good software, you can categorize each expense to summarize it by category later. – user2652379 Apr 23 '18 at 5:55
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Would that be a reasonably accurate way to compute my expenses for 2017?

Yes, I would say that is "reasonably accurate". However, I would urge you to reconsider avoiding the tedious method. If you can spend one weekend and have your entire year's expenses categorized properly, all future budgeting becomes much easier (and the process itself is enlightening). I don't know a single person who has gone through this that has ever regretted it. In today's age of easily importing transaction history from most (if not all) of your accounts, once it's set up the only tedious part is categorizing each expense through "today", and then keeping up with it on a monthly basis. I'm guessing you already do this for your business, so it shouldn't be much of a change to do it personally too.

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I think we're going to need more information to answer this accurately. Namely, when you say 'Balance of all accounts', does that include retirement accounts and more importantly, did you receive any distributions from those accounts? If so were they pre-tax or post-tax retirement accounts?

The problem with using account balances, is that if those balances include brokerage accounts, taking the value increase from 2017 gives you both your contributions, dividends and change in value which is probably not what you want for calculating expenses for 2017. Rather I'd just use SAVINGS_CONTRIBUTIONS_2017 and include only interest income in your INCOME on non-retirement accounts.

Then:

EXPENSES = INCOME - SAVINGS_CONTRIBUTIONS_2017 - TAXES.

This also assumes you're lumping sales tax into EXPENSES rather than TAXES - few people separately track sales tax as it's an accounting nightmare.

Another reason to leave out retirement accounts is that you could easily argue that any loss in those is an expense, thus would you include that? I wouldn't, at least not until I withdraw it and the gain/loss becomes realized.

Finally, calculating SAVINGS_CONTRIBUTIONS is generally pretty easy (e.g. max 401k = 18000 + max IRA ($5500), etc).

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