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The Importance of Retirement Budgeting
Your retirement income is affected by various factors such as inflation, the rate of return on savings and investments, your retirement date, taxes, spending, partial earnings, Social Security, and pensions if available. However, you have the most control over a crucial factor, which is your spending. Once you retire, it may be tempting to consider the money you’ve saved as a good excuse to start checking things off your bucket list. However, overspending can pose a financial risk; you need to make your savings last, perhaps for decades.
You may find yourself willing to make certain compromises to retire earlier, travel more, or spend more on fun and hobbies. A detailed budget helps you live within your means, enjoy your life, and ensure your savings last as long as possible.
Identifying Your Fixed Expenses
Start preparing your retirement budget by gathering the following items:
- Bank statements for the last six to twelve months
- Credit card statements for the last six to twelve months
- The last two pay stubs if you or your spouse are still working
- Last year’s tax return
Look for all of your recurring monthly, quarterly, or annual payments. Using highlighters, categorize your expenses into the following categories:
Essential Spending
This category includes spending on food, clothing, housing, utilities, transportation, and healthcare.
Non-Essential Monthly Expenses
This category includes items for which you receive a monthly bill, such as cable TV, streaming services, gym memberships, cellphone plans, or other subscriptions.
Annual Non-Monthly Expenses
Property tax bills, insurance payments, car registration, and home warranties may come once a year. Add these periodic expenses together and divide by 12 to calculate their monthly cost to include in your retirement budget.
Use graph paper or a spreadsheet program on your computer for time-based expense calculations. List the months from January to December across the top in separate columns. On the left side of the table, write down each expense on a separate line.
If your utility bill averages $200 per month, write $200 in every monthly column. For Christmas gifts, if you spend about $500 a year, divide that amount by 2 and place half in November and the other half in December. Do this for each expense item and then sum the amount for each month. These are your fixed costs.
Calculating Healthcare Costs
If your employer pays for your health insurance, you may need to bear these costs yourself after retirement. If you retire before age 65, you’ll need to explore the options available for healthcare coverage before your Social Security kicks in. Shop for plans now so you can add an estimate for this monthly expense to your retirement budget.
Don’t forget dental, vision, and hearing care. Also include these expenses in your retirement budget. Estimate other healthcare costs such as medications as well, to get a complete picture when preparing your retirement budget.
Calculating Fixed vs. Flexible Costs
Now that you’ve gathered all expected costs, calculate the fixed amount and the flexible amount:
- Add up all your fixed expenses
- Add up all your other non-fixed expenses separately
- Divide the fixed expenses by your total expenses
What percentage of your retirement income will go to cover fixed expenses? Does this percentage align with your thoughts in step three about how you plan to spend your time in retirement? If you have significant monthly obligations such as mortgage and car payments, for example, it may be necessary to make a lifestyle change.
As a rule
In general, if you want to have more fun in retirement, look for ways to reduce fixed expenses so you can have more flexible money available to spend on the interests you enjoy the most.
Source: https://www.thebalancemoney.com/how-to-make-a-retirement-budget-2388345
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