Creating a realistic budget for retirement can be a daunting task. It involves evaluating your current expenses, exploring the costs of “bucket list” retirement dreams, and finding areas where you can minimize spending. There is no better time to start creating a financial retirement plan than today. Find out how you can save money and maximize your nest egg.
Budget for Retirement | How to Make One and Prepare for Your Senior Years
1. Follow Your Own Paper Trail
One of the first steps to budget for retirement is to have a clear idea how much you need by then. For example, it is normal for retirees to do away with bills such as a car or a mortgage. Around this time, they may have paid off the loans. However, other living expenses may also fluctuate or increase. These can include the long-term car expenses or property taxes.
To help you map out your budget by that time, create a retirement budget worksheet. Begin by organizing your present expenses. Gather as many paper and online receipts as you can find, as well as banking and credit card statements. This will help give you a better estimate of what your fixed and voluntary expenses are.
2. Consult an Expert
When you create a budget for retirement, you have to make some significant financial decisions.
Should you contribute more to your individual retirement accounts (IRAs)? If you do not have an IRA, is it too late to start one? Once you retire, should you put off drawing on Social Security benefits? Is it possible to do an early retirement, or what is the best retirement age for you? Is a consolidation loan a good idea? Should you buy into one of those “final expenses” funeral plans the game show hosts tout in television commercials?
Visiting a financial expert who specializes in retirement planning is often a smart idea. They can help you in many aspects such as how to increase savings and pre-retirement income. They can help you manage the retirement benefits and ensure you have a comfortable retirement.
3. Start Your Retirement Budget Worksheet
Once you have your list of current expenses and recommendations from a retirement planner, put your budget for retirement on paper.
Start by grouping line items into categories. There are no hard-and-fast rules about which categories should come first and exactly which categories you put different items into. The list only needs to make sense to you. Here are some baseline groups of potential expenses:
The big-ticket item for most people is the mortgage or rent. If you do not plan on making any changes, start with your current rent or mortgage unless your mortgage will be paid. Include utilities like electricity, cell phone, and/or landline. Add housing-related costs such as homeowner’s insurance, property taxes, or neighborhood association fees.
Look at your average maintenance bills for the year and divide by 12. This includes everything from trips to the hardware store to appliance repair. If you are looking at downsizing to a rental apartment or moving to a retirement community, make sure you understand your retirement spending needs. What is included in the rent in apartment buildings that you like? Does the retirement community have additional costs beyond the basic unit, such as a monthly service plan?
Seniors cannot afford to underestimate how much their health care costs may be. Not anticipating can significantly affect your desire to live comfortably.
Retirement often involves switching over from an employer-subsidized plan to some combination of public Medicare, supplemental Medicare, or private health insurance. Because your insurance is likely to change after retirement, look at what will or will not be covered under your new plan.
Some people buy alternative Medicare options, such as Plan D, which involves prescriptions.
Consider your current medication and health care needs, as well as the insurance you are expecting to have upon retirement. Seriously think about your monthly supplemental insurance as well as the out-of-pocket costs each month. These include co-pays, non-covered medications, medical supplies, and so forth.
However you categorize your health and personal insurance plans, you will want to make sure they do not get left out of the monthly budget.
Include the monthly average for life insurance, disability insurance, and “final expenses” plans. If you plan to start contributing to long-term care insurance, which helps fund nursing care in your later years, include this in the budget for retirement.
Of course, you will have to eat! Unless you expect your lifestyle to change dramatically, you can make an accurate food estimate based on what you currently pay at the grocery store in the course of a month.
Add any meals or snacks you do not eat at home. From your weekly “date night” at a sit-down restaurant to the muffin and coffee you enjoy while doing errands, these items should all be included. If you need room to cut your budget down the road, this will be a good place to start. For now, however, make sure you do not overlook all the line items in your monthly food expenses.
This item is bound to change at least a little after retirement. Are you planning to give up one of your cars if you and your spouse will not be commuting? Will your gas use fall dramatically when you are not driving to work – or do you plan to make a lot of road trips? Will a reliable car be paid off by retirement?
Do not forget to add your monthly car insurance costs, as well as the monthly average of expected repairs and maintenance. Of course, if you live in an area with public transportation and plan to rely on it after retirement, now is the time to look at what monthly bus and/or train passes cost.
This is a category that can fluctuate wildly from family to family. To get a realistic picture for a monthly budget, divide what you spent last year by 12. These are items that are not luxuries but which range from utilitarian to high-end, depending on your current practices.
Include clothing in this category – everything from inner-wear to winter coats, along with fashion upgrades. Toiletries should also be considered in this category. Some people make do with toothpaste, deodorant, and shampoo. Others have a full arsenal of nutritional supplements, luxurious hair care products, and high-end facial creams.
It is possible you may decide to economize on personal items after you retire. For now, make sure you keep an accurate snapshot of your average monthly personal care expenses.
Hopefully, by this time, your personal debts will not make up a huge part of the budget for retirement. However, it is also not unusual to still be paying for student loans and credit card debt. You may have the option to consolidate them later, but putting your current obligations down will help you understand changes you may need to make upon retirement.
Often it is our “miscellaneous” expenses that add spice to life, yet they are notoriously hard to predict. These categories include hobbies, cable and Internet bundles, entertainment, travel, gifts, and charitable contributions. For now, try to average what you currently spend. Include more mundane items, too, such as household cleaning products.
Do not forget summer vacations and year-end holidays, which tend to take a big bite out of the seasonal budget. Many other items only come around once or twice a year such as a large annual charitable contribution. These are items you can divide by 12 to get an honest monthly budget.
Once you have all the expenses, you can estimate the possible increase for your budget for retirement. You can consider the potential inflation rate or use a retirement calculator. If the monthly expenses remain high, remember, you can always make a cost-of-living adjustment.
4. Consider Your Expected Income
Comparing your expected income after retirement with the initial figures on your retirement budget worksheet can be disheartening for many people. Do not worry, you are not alone!
If the first draft of your retirement budget is significantly higher than your expected retirement income, you can look at your non-fixed items first for areas of improvement. Can you order less takeout now you have more time to cook? Do you really need the deluxe cable TV package? Could you cut back on clubs that charge membership fees?
What if you still fall short with your budget for retirement despite cutting back? Additional appointments with a retirement planner will likely find you on firmer footing. You can explore the pros and cons of IRA withdrawal strategies and Social Security timetables, for example. You may restructure your current pension plan. Whatever steps you ultimately decide to take, starting now is your first step toward a more secure future.
Have you made your budget for retirement? Share the items you are planning to include below!