Building a budget for your spending in retirement
Budgeting your spending in retirement looks and works similarly to the way it does in your working years. You may be faced with new and greater expenses, however, and having a budget becomes even more crucial to help you live effectively off of your savings. Building this budget is a step-by-step process.
To calculate your retirement budget, it’s best to first calculate your expected average costs per month. As you estimate what your spending in retirement might be, it can be easy to underestimate your expenses. To help avoid being caught short unexpectedly, start now by making a list of your anticipated costs.
To gauge the accuracy of your forecasted budget, you may want to track your expenses for a few months to check whether your estimates are aligned with your actual expenses.
It’s also important to realize that your retirement budget will change based on when you plan to retire:
- If you retire early, say at age 63, you may need a bigger nest egg to carry you through your retirement years. You also will not get maximum Social Security benefits. If you wait until age 70, you can enjoy the maximum amount.
- If you retire later, you’ll still need to have enough income to last throughout retirement, but you will have fewer years with less income coming in.
What expenses may belong in a retirement budget?
When estimating your retirement budget, consider the following questions to help develop a more complete and accurate set of expenses:
- How many years remain on your mortgage?
- Do you plan to move or downsize your primary residence?
- How will your health insurance premiums change after you retire?
- Have you factored in the increased out-of-pocket medical costs that often accompany age?
- Do you have all of the insurance you need, or should you budget for additional premiums, such as long-term care insurance?
- Will you spend more on travel or hobbies once you have more time to devote to them?
- How much could inflation potentially increase your cost of living?
Assess essential, discretionary and one-time retirement expenses
Understand what types of expenses you’re likely to incur and how big they’re going to be each year. This may help you determine how much income you may need to meet your average monthly expenses and cover any surprises. Your expenses may fall into the following categories: essential (must-have), discretionary (optional) and one-time (a remarkable but necessary occurrence).
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Your essential average monthly expenses in retirement can include categories such as household, transportation, living expenses, family care and medical/health. You may not be able to live without these retirement expenses.
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Discretionary expenses can include costs such as entertainment, eating out, hobbies, subscriptions, education, travel/vacations, charitable donations, gifts, professional/social dues and gym memberships. These are your extras. Unlike essential expenses, they’re more discretionary. If necessary, you may be able to forgo or reduce them.
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In retirement, you might incur some one-time expenses such as a child’s wedding, a grandchild’s college tuition, an emergency (such as a major home repair), a home improvement or the passing of a loved one. By planning ahead for these potential liquidity needs and factoring them into your budget, you may lessen the chance of unpleasant surprises.
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Don’t forget taxes as you’re formulating your retirement budget. You may have to factor in federal, state and local income taxes, as well as property taxes if you own a home.
The importance of ongoing monitoring Because your expenses are likely to change over time, you might need to adjust your retirement income plan to accurately reflect these changes. You may want to continue to monitor your expenses and adjust your budget throughout retirement.
