Why You Shouldn’t Enter Retirement Without a Budget

Not budgeting for retirement is like traveling to a new destination without using GPS (today’s modern-day road map). Budgeting is vital at every phase of your life, but when retirement looms on the horizon, it is more critical than ever.

People are living longer today, and many can expect to live well into their 90s. This means retirement can last for more than 30 years. “Winging it” when it comes to retirement only improves the chances that you might outlive your money.

Budgeting gives you a snapshot of both sides of the divide: your expenses and your available income. Having this knowledge accomplishes five important things:

  1. Removes some of the stress from your life
  2. Guides you in making present and future financial decisions
  3. Reduces the likelihood of financial mistakes
  4. Keeps you from scrambling to make changes down the road
  5. Assures that you and your partner are on the same page when it comes to making financial decisions

You can begin the process by looking at your current and projected expenses.

Deciding Where to Live in Retirement

Housing is one of the most significant factors to consider when planning retirement. Housing costs include your mortgage payment, property taxes, homeowners insurance, and utility bills, as well as maintenance and other household expenses. Knowing this information will help you decide whether to relocate, downsize, buy a second home, or rent.

Read more about the different options to consider when deciding where you will live in retirement.

Controlling Health Care Costs in Retirement

Annual healthcare costs tend to rise precipitously later in life. And while Medicare will certainly help once you hit age 65, it won’t come close to covering your overall health care costs. A recent study by Fidelity Investments shows the average couple can expect to pay nearly $300,000 in health care costs throughout their retirement life. The major components to consider include insurance, healthcare provider costs, prescription drugs, and long-term care. Not having a long-term care plan is one of the most common mistakes people make as they approach retirement.

Understanding Tax Obligations When Budgeting for Retirement

If you’re like most people, your taxes will decrease in retirement – although most retirement income sources will be subject to some level of federal and state income taxes. Also, you may be withdrawing money from your retirement accounts, which may be taxable. Understand what your tax obligations will be and if there are ways to minimize them.

Reducing Your Transportation and Automobile Costs

Transportation and automobile costs can be high. Your habits in retirement will change. You will stop commuting, which may save you money in areas such as wear and tear of your car, fuel costs, and tolls. However, you may wish to travel more to explore new and favorite places or visit family and friends, which will require a reliable vehicle. Consider your loan payments, auto and liability insurance costs, maintenance, tolls, and fuel expenses. Having a budget – as well as retirement goals in mind – may help you decide if you will want to trade in your old car, buy a used one, only keep one car, or depend more on public transportation.

Planning for Discretionary Expenses When Budgeting for Retirement

Planning for discretionary spending includes all the things you enjoy spending your money on. For example, consider entertainment and vacations, clothing purchases, personal care, dining out, lending or gifting money to family members (such as helping your children buy a house or funding your grandchildren’s education), and charitable contributions, among others. With a budget in hand, you will have a better sense of how much you can spend. You may realize you will need to limit yourself to eating out only on weekends or take vacations to less exotic locales. Or you may discover that you can comfortably continue to give to your favorite charitable causes, travel, and support family members.

How to Create your Retirement Budget

Once you have identified all your expenses, create a list of your retirement income sources (e.g., liquid assets, social security, pensions, retirement funds, etc.). This will create a picture of how much you can afford to spend every month. If you’re coming up short, you have some choices: you can either adjust your expenses or look to increase your retirement income. If it’s the latter, this may mean working longer, taking a part-time job, consulting in your field, or withdrawing existing assets you planned to save.

To create a proper budget, speak with your financial planner. You can also utilize online budgeting tools such as Mint.com, Quicken, Goodbudget, and others.

Life is indeed full of surprises. Investments fluctuate, family dynamics change, and unexpected costs appear. Through all of these things, budgeting for retirement represents the foundation needed to help you make decisions about your future. It will increase your chances of achieving your financial and personal goals and living the retirement you always dreamed about.