If you’re nearing retirement, you’ve likely taken steps to prepare financially for the future. What you plan to do in retirement has a direct effect on your retirement budget. Anticipating your income and expenses in retirement actually comes years before you make the jump.
Surprisingly, money isn’t the main consideration when planning your retirement budget. Retirement expert and author of Safe 4 Retirement: The 4 Keys to Your Safe Retirement, Jack Tatar, says people have to think about what they want to do while in retirement in order to budget accordingly.
“You don’t just want retirement to happen. You need to take into consideration your assets, expenses, and emotional needs,” says Tatar.
If retirement is around the corner or even years away, get a head start by taking your retirement budget for a practice run. Budgeting and cutting costs in different areas can create more wiggle room in your finances and give you an overall better quality of life throughout retirement.
Estimate Expenses: Although you may be debt-free and have planned well throughout your life, sticking to a solid budget through retirement will allow you to enjoy your golden years without worry. It’s a given that you will still have monthly expenses, such as healthcare and leisure activities, but with life spans of the average baby boomer increasing, so will living expenses.
Tatar suggests making a comprehensive budget that covers investments, taxes, insurance, health care, living accommodations, and unforeseen events. “Track your current expenses. Look at the past several months’ of cash receipts and bank and credit card statements, and list expenses you anticipate will continue in retirement,” says Tatar.
Because needs vary from person to person, it’s a good idea to review every expense to get a clear understanding of what your retirement will actually cost.
Kiplinger recommends recording average monthly expenses for at least four to six months – separating essentials (mortgage payments, food, utilities, and clothing) from discretionary expenses (dining out, vacations, and gifts.)
Tatar is a big proponent of ditching big expenses such as a mortgage to provide financial peace of mind. “If you have the means to pay off your mortgage early or before you step into retirement, doing so will cut out a huge chunk of your monthly expenses.”
You can use the Ally Wallet Wise Worksheet to estimate your monthly income, expenses and savings in retirement.
Know Your Assets: Retirees can’t make plans if they don’t know how much money they have set aside. Identify all sources of income that you’ll have when you retire – which include investments, retirement savings, pensions, and Social Security.
You can estimate your retirement benefits at http://www.socialsecurity.gov/.
One rule of thumb suggests withdrawing roughly 4% of your assets in your first year of retirement. The 4% rule withdrawal rate is normally sustainable for most portfolio allocations. The strategy improves the odds that you won’t outlive your money.
Once you assess your expenses and income, you should have a pretty good idea of what your financial health could be like during your retirement years. While some people will find that they have more than enough to live comfortably, others will realize they won’t be able to cover their expenses.
“If you come to the realization you haven’t saved enough as you approach retirement, you have time to work longer or lower your expectations,” says Tatar.
By knowing where you stand financially, you can make any necessary adjustments to your planning and determine how much more work you have to do to reach your goals.
Emotional Needs: Budgeting for retirement isn’t just a financial issue. Your role as an employee may be reduced or over, but your role as a spouse, partner, parent, grandparent and friend doesn’t end.
It’s important to think what you’re passionate about and how your retirement budget will sustain those interests. Some retirees ease into retirement, spending more time with family and on hobbies. But others experience anxiety, even depression as they leave their working life.
“By thinking about what goals and dreams you want to fulfill in retirement helps you to identify the funds appropriately. If you don’t know what you want to do in retirement, you run the risk of wasting precious time, becoming depressed and possibly wrecking your budget,” says Tatar.
According to the American Psychological Association, people who have healthy lifestyles not only live longer but also have better cognitive abilities, fewer health problems, and fewer disabilities than those who do not have healthy lifestyles.
Explore your intended retirement hobbies and activities now. Find out how much you need to budget for those hobbies. You may decide retirement doesn’t mean you have to stop working completely. You can work part-time, open your own business or volunteer.
“Retirement isn’t the finish line. Retirement is the next phase of your life. For many, it’s what they’ve worked their whole adult life for. It should be a time when you can be free to live the future you’ve been fantasizing about and planning for,” says Tatar.
Chances are if you plan accordingly for both quality and affordability of life, you will thrive in retirement.