The Test Year

Perhaps one of the most terrifying concepts about retirement is living on your investments rather than your job income.  It takes a bit of adjusting to the concept and there is the obvious fear of did I get this wrong.  Did I get the taxes right? Or did I forget the car insurance?  Did I leave enough for food?

So to help get over this fear I’m going to suggest the year before you retire you do a little two fold experiment.  First track every penny you spend for the year before you retire.  I know it’s a pain in the ass, but it will be highly useful to prove to yourself you have saved enough.

Then second track all of your investment income for the year.  Every dime of it.  Then when you file your taxes do a test run for that year.  This is ideal if you use tax software.  Do your regular return and then do a test run with your job income at zero.

Now adjust your spending for the year to match your projected retirement lifestyle.  Strip out parking and any job related expenses and add in an real cost estimate of any trips you would have taken if you were retired or hobbies.  Then compare your income test run to your modified spending.  Is the income higher? If so, great you are ready to go.  If not, you likely forgot something or you need to look at your numbers again to satisfied yourself you know what happened and you are not worried about it.  Remember this is all about putting your mind at ease so be honest with yourself.

The other great concept about the test year if you can also build up a nice cash reserve to help cover any unexpected expenses or be your first years income when you pull the plug.  The cash reserve gives you the option of delaying taking money out of your investments if you hit a down market.

So what do you think?  Would the test year be useful for you or not?  Or do you have a better idea?  If so, please share with a comment.

4 thoughts on “The Test Year”

  1. I may be missing something in your plan but the glaring problem with this approach is that investment income – as we’ve seen in recent years! – can be drastically different from one year to the next. That is the real fear that most of us face when considering retirement.

  2. Another option could be to funnel all of your work income to a separate account for that year and live off of your investment income alone, and see if it works. If it does, you have a nice slush fund and congratulations, you are retired. If it doesn’t, then you will probably need to keep working, but you’ve learned a lot in the process. (Yes, there would probably be lower income tax and fewer expenses when you actually stop working, but if you can survive this year, you’ll probably be able to weather market fluctuations too.)

  3. A few thoughts.

    Round off all spending to the nearest dollar to save work. Add categories manually and put in a spread sheet for each month.

    For couples, you need both spouses on the same page, doing the same thing.

    Jot down all spending, with no receipts, on a small piece of paper you keep with you receipts. $3 for coffee etc. Doesn’t matter where and exactly when…just that in the month of August you spent $3 somewhere for coffee.

    Do every year from now on or at least a for a few years prior to retirement. This builds emotional confidence in the numbers and avoids depending upon a non-typcial year.

    Use the numbers to tell you when you can retire rather than after you decide to retire.

    Don’t forget about workplace dental plan benefits etc., things that don’t show up in your income and expenses.

    Use broad categories to save work.


  4. rab,

    Good point. But then do you make do with a specific amount over that or just use an average of a longer period of time.


    Actually that is an excellent way to handle the issue and provide a simulation of market issues.


    Your right a few years of spending data would be better. Thanks for the feedback. I love your quote “Use the numbers to tell you when you can retire rather than after you decide to retire”

    Some great ideas to expand this concept. Thanks everyone.


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