Many people fear running out of money in retirement. Creating a retirement budget can help you make sure this doesn't happen.
A retirement budget outlines the funds you will have coming in during retirement and how you can use them to cover all your regular bills and unexpected expenses.
“It is always beneficial to draft a retirement budget when preparing to retire or already in retirement,” says Janet C. Steinke, a senior wealth advisor for Buckingham Advisors in Dayton, Ohio.
This helps establish what will be needed and how this need will be met.”
To create a retirement budget, you’ll want to follow these steps:
List your expected spending
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Start with an estimate of the income you will need
Consider expenses that will change in retirement
Factor in big lifestyle changes
Estimate your retirement income
Set up a spending plan you can track and adjust
Try out your budget
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SELECT A STEP BELOW TO BEGIN
Start with an
How much will you need each month during retirement?
isn’t always obvious.
“Often it is suggested that a retiree take their pre-retirement income and estimate
70% to 80%
as a good retirement budget,” Steinke says. If you’re still working and your salary is
a year, you might estimate that you will need
You can further refine what you’ll need each month by dividing the annual income by 12 to determine a monthly budget.
YOU WILL NEED
$70,000 to $80,000
annually in retirement as a starting point.
Many of your expenses are likely to stay the same in retirement.
Look at your current costs related to housing, groceries, insurance, debt, family care and leisure activities.
Consider typical expenses for Medicare premiums and your cell phone bill.
That Will Change
Think ahead to the future and your plans. Once you have an initial idea of the income you might need, it’s time to account for lifestyle changes.
“Reduce items such as a clothing allowance if professional clothes are no longer needed, or reduce meals eaten out if that spending pattern will change,” Steinke says.
Also add in any lifestyle changes or hobbies that will increase your expenses in certain areas.
— says Joe Buhrmann, manager of financial planning support at COUNTRY Financial in Bloomington, Illinois.
If you want to relocate to an area with a higher cost of living or increase your travel, those categories will need to be adjusted.
“Some want to escape to a sunny beach or calming mountain top, while others just want to sip coffee on their porch in the morning and escape the rat race that comes with owning and operating a business,”
Focus on the choices that will bring you a feeling of fulfillment and purpose.
As you think through your retirement plans, keep in mind that your desires will likely be unique.
If you or your spouse (or both) have enough work credits, you can expect to receive Social Security payments. These benefits are based on your earnings record, and you can get a
personalized estimate of
your Social Security
retirement benefit by creating
a my Social Security account.
In addition, if you have a
401(k), IRA or other retirement
account, review the amount
you have saved in the plan.
“If you are still working and will receive a pension, talk with your employer’s human resources department for details,” says Michael Micheletti, senior director of corporate communications with Freedom Financial Network in San Mateo, California. Consider any other income sources, such as savings accounts, rental income or a side job you plan to pick up or hold in retirement.
IS COMING IN
In retirement, rather than receiving a single paycheck from your workplace each month, you will likely be dealing with several sources of income.
MAP OUT A
After estimating your expenses, adjusting for new lifestyle changes and factoring in your actual income streams, you can set up a system that allows for tracking. “Choose your budgeting tool,” Micheletti says. If you already use an app or software, you might continue with this for your retirement budget. You can also use a spreadsheet or pen and paper. “Choose what’s more comfortable for you,” Micheletti says.
In the budgeting tool, add up what you expect your actual household income to be in retirement. Include Social Security benefits, retirement account withdrawals, side job income and any other sources of income. Compare this figure to your estimated retirement expenses. Subtract the total expense from the overall income. “If the resulting number is negative, or does not help you achieve your financial goals, you must face the facts and find a way to cut expenses or increase income,” Micheletti says.
Flexible spending accounts and health savings accounts are two ways to shield money spent on health care from taxes.
You might be able to lower your housing costs by moving to a smaller home or reduce transportation expenses by limiting your travel plans. You could also look for
ways to boost your income by saving
more now if you’re not retired, taking
on a job in retirement or selling a
large asset you no longer need,
such as a boat or second car.
You might make plans to boost your savings if you’re still working to have even more income available later. “If you’re financially comfortable after your test drive, that might mean you’re closer than you thought to calling yourself a retiree,” Buhrmann says.
“Set that as your new monthly budget and continue to work,” Buhrmann says. “Direct any income that exceeds your new monthly budget to your 401(k) or other retirement plans to boost that balance during your ‘test drive'.” If you spend more than anticipated, go back to the budget and see where adjustments can be made. You may find you overlooked certain expenses, such as finishing up a debt payment plan or eating out with friends.
After trying out your retirement budget for several months, you’ll likely have a good indication of what you will need to live on during retirement.
For instance, those in the finance sector may see a tax shelter as a specific type of investment. "You make an investment, and the tax benefits in the year of the investment are more than the investment itself," Smith says.
After you’ve set up a retirement budget, it can be a good idea to test drive your plans while you are still working.