Most of you probably have some notion of your retirement goals. You may visualize traveling, spending more time with your grandchildren, or even turning a hobby into a retirement business. No matter what kind of activities you hope to enjoy, goals without plans to achieve them are just wishes. Naturally, retirement plans include reasonable budgets. We want to help you get started by telling you how to budget for retirement in seven simple steps.
Why Do You Need to Begin With a Retirement Budget?
Sadly, many elements of retirement are outside of your direct control. A market downturn could reduce the value of some assets. Company downsizing or health issues might force you to retire early. While it’s impossible to predict everything that could happen over the course of decades, you can control your spending if you take the time to understand it.
For instance, you can prioritize different kinds of spending:
- You will have high-priority spending, such as housing and healthcare.
- You will also have low-priority spending, like vacations and entertainment.
Instead of forcing you to become rigid during retirement, a solid budget will truly give you more flexibility to adjust your lifestyle and reduce stress because you won’t be tempted to overspend on things that you don’t need or that don’t offer you a great value.
Budgeting For Retirement in Seven Easy Steps
Once you understand the importance of creating a budget, you can take these simple steps to create your first draft.
- Gather the Information You Need
Sadly, many people don’t really take the time to understand their personal finances, so they can’t possibly develop a budget for the present or the future. Start planning by looking at the real numbers from your recent past.
Begin by collecting these valuable documents:
- A year of bank statements
- A year of credit card statements
- Information about other outstanding debts
After you have gathered this information, you can begin by breaking down your actual spending habits into categories. For instance, you will have essential expenses, like utilities and groceries. You probably also spend money on some non-essential items, like entertainment and dining out.
- Calculate Essential Expenses
You should first determine how much money you will need to cover the essentials. Examples of these essential expenses include housing, food, utilities, transportation, and food. You can use the documents you gathered to figure out how much you spend upon these kinds of fixed expenses now. Many people find that this part of the exercise helps them realize that they underestimated certain kinds of fixed expenses.
These are examples of typical retirement expenses and the portion of spending that average retirees allocate to them:
Source: U.S. Bureau of Labor Statistics, 2016
- Determine Your Essential Retirement Expenses
Naturally, your retirement expenses may change later. For example, many retirees choose to downsize to a smaller home or apartment after their children leave home. You might not need to invest in commuting or work clothes. On the other hand, utility bills could increase because you’ll stay home more or the price of power has increased.
A good rule of thumb is to start by simply adding up your current expenses and dividing by twelve to determine your essential monthly budget. After that, you can make adjustments, based upon some fixed costs that may increase or decrease. Even if you plan to reduce your cost of living during retirement, you won’t regret erring on the side of spending more instead of spending less for this part of the process.
- List Non-Essential Monthly Expenses
Naturally, you won’t just plan to spend money on things you absolutely require to survive and remain healthy. Obvious examples of important but non-essential expenses might include a gym, cable TV, golf fees, or magazine subscriptions.
Even though you don’t absolutely need these things to survive, you can still count them under your current fixed expenses. As with essential expenses, add up your yearly spending for non-essential products and services and then divide by twelve to include them to your monthly budget.
- Estimate Future Healthcare Expenses
Healthcare really deserves its own category, separate from other essential costs. Naturally, you can’t predict the cost of all of the healthcare services that you might need in the future; however, you can estimate premiums for the kind of insurance you may buy to keep these costs under control.
If you plan to retire before you qualify for Medicare, you might also shop around for individual insurance policies to estimate the cost. Medicare beneficiaries who don’t have a related health insurance plan through their jobs or a public program almost always purchase Medicare supplements or join Medicare Advantage. If you need help understanding Medicare and related insurance, please download our free guide to Medicare and Social Security.
- Visualize and Define Your Retirement Lifestyle
Finally, you get to enjoy one of the fun parts of your retirement plan. You can decide what you hope to get out of your retirement lifestyle. If you’re not sure where to start, you can refer to our article about defining your retirement lifestyle or simply look at the infographic below.
You should now think about ways that your ideal lifestyle may change during retirement. For instance, you might have a lot more time to play golf, but you may not care to play five times a week when you get older. Even though you could plan to leave your current job or career, you might decide to pick up a part-time job for extra income or just to keep you active and engaged. Many retirees also decide to turn a hobby into a retirement business.
- Recalculate Your Ratios
Take a hard look at your budget’s total for essential and non-essential expenses. If the number’s too high for you to afford on your anticipated retirement income, you may need to evaluate your future lifestyle.
This is no time to panic because you may be able to find some simple adjustments that you can make to either your spending plan or your income. For example, you can usually find ways to reduce such fixed costs as housing or utilities. Get some ideas by reading our article about cutting retirement expenses. Even if your first try at creating a budget doesn’t give you good news, this is still news that’s good to know.
Wrapping Up Your First Retirement Budget
Again, this first draft of your retirement budget won’t commit you to anything. Once you have a map, you can more confidently take another path. The purpose of this initial budget is to help you make adjustments and remain flexible and not to lock you into any particular choices. Still, you will find that understanding your current budget and how it may change during your retirement years will provide you with the information you will need to make good decisions today and many years from now.
After you have examined your budget and current savings, you may decide you could use some help with a plan to obtain your retirement goals. No matter how financially responsible you’ve been, you can almost always find ways to improve. If you haven’t thought about retirement much in the past, it’s still better to start soon, so you have time to set a realistic retirement budget and make adjustments to your lifestyle.
No matter where you are along your retirement path, send us an email to learn exactly how we’ve helped plenty of people in similar situations.