Budgeting is a skill that many retirement investors struggle with, but a good retirement plan requires a budget to function properly.
In this article:
- Figure Out the Specific Amount That Provides Peace of Mind
- Make Both Short-Term and Long-Term Budget Plans
- Use Budgeting Apps As Guides, Not Rules
- Consider Using Zero-Based Budgeting
- Keep Track of Past Expenses and Revenue
- Use the Past to Project the Future
- Update Your Investment Strategy
- Have an Annual Financial Check-up
- Learn About Alternative Investments
Preparing for Retirement: 9 Budgeting Tips to Help Investors in the Next Stage
1. Figure Out the Specific Amount That Provides Peace of Mind
According to a 2018 Survey by Gallup, most workers plan to retire at 66.
The National Center for Health Statistics says that the average life expectancy of someone residing in the U.S. is around 78, with males at 76 and females at 81.
Based on these statistics, an employee who wishes to retire at 66 and enjoy a comfortable retirement needs to save at least 10 to 15 years of current income. There is also variance involved, as many will live beyond 78 years old.
It’s ideal for investors to come up with an amount that can put their minds at ease for retirement.
But how does one do this? Here’s a sample computation for a male worker who plans to retire at 66:
- He plans to retire at 66 years old and will need $100,000 annually.
- This man will need at least $1,000,000 in his retirement nest egg for a comfortable 10-year retirement.
Of course, Social Security, as well as annuity plans, come into play, so the amount can be higher or lower. An IRA can help the investor save on taxes and provide returns, but other retirement vehicles, like an insurance plan and bank savings, can help as well.
Retirees often worry about outliving a retirement nest egg, but the mentality of hoping for the best and preparing for the worst can help provide security and peace of mind later on.
2. Make Both Short-Term and Long-Term Budget Plans
Before reaching an investor’s proper age of retirement, a sizable safety net should preferably be in place. In order to have savings other than the one set aside for retirement, investors may want to have two budgeting plans.
Short-Term Budget Plan
- A short-term budget plan aims at building a “rainy day fund,” so to speak. Conventional wisdom says that savings that will allow a person to live 6 months without income should suffice, but more is preferable.
- This type of budget plan focuses on finances for a year or less.
Long-Term Budget Plan
- This plan includes the allocation of monthly expenses, increasing or decreasing of amounts, as well as setting aside money for savings.
- The long-term plan focuses on reaching a goal within quite a longer time-frame, typically 3 to 5 years.
3. Use Budgeting Apps As Guides, Not Rules
There are investment apps that a lot of the public can benefit from and, unfortunately, are not as well-known. These can help investors, both seasoned veterans and curious beginners, in making a budget.
However, these applications are only tools, and while these apps can provide guidance, they are not substitutes for actual records.
Like all technology, budgeting apps also come with certain risks and disadvantages, including:
- There may be times when the apps are down and can’t be used, especially when they need to update or perform server maintenance.
- Also, there are security risks that go beyond the app, like having the phone or computer stolen or information hacked through a different digital venue.
4. Consider Using Zero-Based Budgeting
Zero-Based Budgeting Definition: Zero-based budgeting refers to an accounting method where accounting starts with 0 and works up to the total amount rather than starting with a set amount, like the previous month budget or total expenses.
A lot of small businesses, as well as individual taxpayers, utilize the methodical zero-based budgeting process.
There are several upsides to starting with 0:
- The ability to save any previous month excess automatically and start a budget with a fresh pair of eyes.
- Another important advantage is knowing where money really goes rather than making guesses and theories.
However, there are also downsides to zero-based budgeting. The most common drawback, especially for beginners, is time.
Starting with a set amount, like a previous month’s budget or expenses and revenue, makes budgeting easier. However, starting from scratch can take up some time, especially with getting information and recording numbers.
The earlier investors start budgeting from scratch rather than with a set number, the faster they can master zero-based budgeting.
5. Keep Track of Past Expenses and Revenue
Investors who record their revenues and expenses immediately after the transaction have more accurate records.
People usually overestimate their short-term memory capabilities. According to an article posted on psychology website Simply Psychology, the longer the delay, the less information is recalled.
Using apps may be convenient, but physically writing down something increases the likelihood of recall and provides physical evidence to support one’s recollection of the event.
Writing down the amount and transaction details on a piece of paper forces your body to participate. This contributes to making one’s memory stronger, which means that the investor will have two sources of information about the transaction—the piece of paper and memory.
6. Use the Past to Project the Future
After making a budget starting from zero, most investors will be able to find a pattern in their financial movements.
Making a budget with an already-set number in mind can make investors fixated on that specific number. This fixation can cause investors to lose sight of patterns that they may not have noticed if the focus was on the process, and not the goal (set number).
Zero-based budgeting makes investors focus on inputting all information first, then analyzing the numbers to reach a solution once an investor finds a pattern (e.g. which expense continues to grow or which area may need more cash for optimal efficiency).
7. Update Your Investment Strategy
The economy changes with the times.
The public may categorize an investment vehicle, like stocks or bonds, as the primary investment or diversifying asset depending on the economic climate.
With that said, investors may need to change how to budget their income, especially when it comes to savings and investment.
Banks may decrease interest rates, or the government may push prices down on real estate. Investors can then flexibly make transactions without sacrificing the integrity of the investment philosophy.
It’s essential to keep abreast of the current situation of financial markets. With current information, an investor can keep up with changes and trends, and analyze what to do next.
8. Have an Annual Financial Check-up
Reviewing both the short-term and long-term budgets are critical for investors to reach their retirement goals.
Just following a budget is not enough. Due to the complex and ever-changing nature of finance, what may work before may not benefit future retirement plans.
For example, the IRS can increase or decrease the maximum IRA contributions as well as the tax rate dependent on new legislation from Congress.
An annual review is necessary, both to see which areas investors have progressed or stalled in so they can improve on them, as well as update both short-term and long-term budgets.
Spending an hour or two talking things through with an accountant or a tax professional can benefit an investor, as having a fresh pair of expert eyes can provide insights that most investors may not be able to see.
9. Learn About Alternative Investments
With the development and growth of society comes economic activity, which affects all portfolios. This growth has also bred alternative investments.
Here are some examples of alternative investments that some IRA investors have invested in:
- The marijuana sector is a relatively newer industry that has grown in recent years and can provide IRA investors with possible high growth.
- Another is cryptocurrencies, such as Bitcoin, which some IRA investors have decided to include in their portfolios.
A brand-new learning curve and the risk of investors making mistakes comes with new investments. Industry experts like cryptocurrency specialist BitIRA as well as reputable precious metals dealer Birch Gold fill the need for investors seeking out competence and market specialization.
With these nine budgeting tips, investors can plan ahead for retirement without sacrificing their present needs. However, these also come with the investor’s own special requirements and the potential need for more advanced techniques, which is where a market specialist can be of assistance.
Whatever the financial health of the investor, one thing is clear: budgeting is critical for a healthy financial life.
Do you have other budgeting techniques you want to share? Share them with us in the comments section below.