Building Your Retirement Budget? Be Realistic and Cash Smart

March 29, 2017
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So you’re planning your retirement, and you say you’ll chop the budget, since your spending will go down in retirement. Right? Well, that’s the conventional wisdom, but it may or may not hold true.

If you’re one of the disciplined folks who actually has a budget, perhaps you stay close most of the time, but splurge now and then. You’re human, after all. 

A budget tells us what we can't afford, but it doesn't keep us from buying it. —William Feather

In retirement, instead of living off your income, you may be drawing from a number of taxable and retirement accounts, along with a pension (if you’re lucky) and Social Security. There may not be as much leeway for your spending as during your income-generating years.

In other words, plan to set a realistic retirement budget.

Look At Your Current Cash Flow

“First, it is important to get a handle on what you are actually spending now,” says David Peterson, managing director at United Capital. “Analyze your credit card and checking account statements over the last three to six months to determine your average monthly spending. Compile a list of the essentials and consider what spending areas may go down, and what other areas could go up in retirement,” Peterson says.

Peterson recommends taking a “sober look” at your retirement situation. Sure, when you retire you won’t need a professional wardrobe, and you might not go out for lunch as often—but then, you might. It might be the case that, the more time you have on your hands, the more likely you are to fill that time with activities that increase spending.

For example, it's said that the only thing better than being a parent is being a grandparent. "If you have children who live in another state, it's important to budget for trips to see your children and grandchildren. With the free time people now have in retirement, trips to see the children and grandchildren are often more frequent than people realize," Peterson says.

Line Items to Consider

Peterson outlines eight categories to help you get started building your retirement budget.

1. Housing expenses. Will your mortgage be paid off by the time you retire? If so, congratulations! If not, this could remain a major line item in your budget. Even if your mortgage is paid off, you still could face big-ticket items like a new roof in retirement, in addition to property taxes and perhaps homeowner association (HOA) fees.

2. New car purchases. Depending on when you retire, you might need a couple of new cars over your retirement. Remember to factor in this major expense.

3. Health insurance. For most, a Medicare supplement policy will be a must. And if you’re retiring before the age of 65, you need to budget additional dollars for the cost of health care until age 65, when Medicare eligibility occurs.

4. Home maintenance. Dishwashers, refrigerators, and other appliances eventually need to be replaced. You probably haven't thought about your hot water heater for years—that is, unless you recently had one break down. And are you planning to take care of your lawn and other household chores, or would you like to hire someone?

5. Long-term care insurance. "A long-term care illness could destroy a couple’s financial situation, making it difficult for the healthy spouse to succeed financially if all the money is going toward the long-term care of the other spouse," Peterson says.

6. Vacations. People have more free time in retirement and frequently travel more, especially in those first few years. If children are out-of-state, you need to account for travel expenses.

7. Hobbies. Expensive hobbies such as golf or skiing can take significant resources and need to be included in the budget.

8. General living expenses. Food, utilities, cell phone, Internet, gas, car maintenance, and at least a modicum of entertainment are among the necessities of life.

There are no clear rules about how much you’ll spend in retirement, because everyone is different. "I have clients who are complete homebodies and spend significantly less than they did while they were working. Some spend so little that I have to encourage them to spend money," Peterson says.

"On the other hand, I know people who are bored in retirement and spend money like there's no tomorrow. I would like to tell these people that if they don't reduce their spending they are going to go broke. It is impossible to out-invest poor spending habits," Peterson says.

Build in Some Slush

Just like the rainy day/emergency fund that you have during your working years, it’s always wise to leave yourself some wiggle room in your retirement budget. For example, health care costs during your retirement could be a complete wild card, Peterson warns. "Sometimes people will have very few health problems, and other times they are constantly going to the doctor," he says.

Building out a realistic budget now for what you will likely spend in retirement can not only help you achieve your retirement goals, but might also help you enjoy it with less worry and guilt. Just like the turtle and the hare when it comes to building your retirement nest egg, slow and steady saving could win the race. 

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Retirement planning isn’t a set-it-and-forget-it proposition. Your plans take thoughtful care and the help of professionals.