Many people fear they’ll run out of money during retirement. Creating a retirement budget can help alleviate that anxiety and set you up for financial success later in life.
A retirement budget should include all the income you will have coming in during retirement along with your regular bills and unexpected expenses.
“It is always beneficial to draft a retirement budget when preparing to retire or already in retirement,” said Janet Borda Steinke, a certified financial planner and senior wealth advisor for Buckingham Advisors in Dayton, Ohio, in an email. “This helps establish what will be needed and how this need will be met.”
To create a retirement budget, follow these steps:
— Calculate your retirement income goal.
— List your expected spending.
— Identify expenses that may change in retirement.
— Factor in lifestyle changes.
— Estimate your retirement income.
— Map out a spending plan.
— Try out your budget.
Calculate Your Retirement Income Goal
How much will you need each month during retirement? The answer isn’t always obvious.
“Often it is suggested that a retiree take their preretirement income and estimate 70% to 80% as a good retirement budget,” Steinke said. If you’re still working and your salary is $100,000 a year, you might estimate that you will need $70,000 to $80,000 annually in retirement as a starting point. That reduction accounts for the fact that you will no longer need to pay payroll taxes or set aside as much in savings in retirement.
You can further refine what you’ll need each month by dividing the annual income by 12 to determine a monthly budget.
[Read: What Is a Good Monthly Retirement Income?]
List Your Expected Spending
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 cellphone bill.
“Housing and health care will be two of your largest expenses in retirement,” said Alan Cantrell, president and CEO of Retirement Strategies Group in Fayetteville, Arkansas, in an email.
Identify Expenses That May Change in Retirement
Think ahead to your future plans. Once you have a rough idea of the income you’ll 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 said. Also add in any lifestyle changes or hobbies that will increase your expenses in certain areas.
Factor in Lifestyle Changes
If you want to relocate to an area with a higher cost of living or increase your travel, those categories must be adjusted. As you think through your retirement plans, keep in mind that your desires will likely be unique.
“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,” said Joe Buhrmann, an advisory financial planning consultant at eMoney in Bloomington, Illinois, in an email. Focus on the choices that will bring you a feeling of fulfillment and purpose.
[See: The Cheapest Places to Retire Abroad on $1K Per Month]
Estimate Your Retirement Income
In retirement, rather than receiving a single paycheck from your workplace each month, you will likely be dealing with several sources of income. 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. Consider any other income sources, such as savings accounts, rental income or a side job you plan to pick up in retirement.
Map Out a Spending Plan
After estimating your expenses, adjusting for lifestyle changes and factoring in income streams, you can set up a tracking system to help you adhere to your budget. You can use a budgeting app, create a spreadsheet or simply use a pen and paper to record your finances.
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 result is negative, make adjustments either by increasing your income or lowering your expenses.
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 such as taking on a job in retirement or selling a large asset you no longer need, such as a boat or second car.
[How to Earn $50K, $70K and $100K Per Year in Retirement]
Try Out Your Budget
After you’ve set up a retirement budget, it can be a good idea to test drive your plans while you are still working.
“Set that as your new monthly budget and continue to work,” Buhrmann said. “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.
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. If you’re still working, look for ways to boost your savings so you’ll have even more income available later in life.
“If you’re financially comfortable after your test drive, that might mean you’re closer than you thought to calling yourself a retiree,” Buhrmann said.
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How to Create a Retirement Budget originally appeared on usnews.com
Update 04/04/24: This story was previously published at an earlier date and has been updated with new information.
