Building A Retirement Budget: There's Room for Fun If You Plan

Planning for your retirement? Here are 9 things to consider for your checklist.

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Key Takeaways

  • Start with the mandatory expenses.
  • Consider your retirement income.
  • Prioritize the discretionary expenses.

Let's face it: the retirement funding formula has shifted over the past couple generations. Pensions, once the norm among private companies, have been supplanted by 401(k)s and other defined contribution plans. Plus, some industry professionals have projected shortfalls to Social Security and Medicare, which could affect your retirement income. This doesn't mean you can't do those things you've planned for your retirement, but it does mean taking a good look at your potential cash flow and finding ways to cut back if you anticipate a lower income in retirement than you were accustomed to during your work years. 

In other words, you may want to get your spending into shape as you approach retirement, and draw up a budget you can stick to.

What's on Your Spending List?

A lot of people never take a good look at all the things they spend on. That might be OK if you have a paycheck coming in every week or two, but once those paychecks stop coming and you're relying on your savings, you'll want to consider taking a look at your receipts.

“First, it is important to get a handle on what you are actually spending now,” says David Peterson, managing director at United Capital. 

Peterson suggests taking the following steps to start:

  • 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.
  • Remember that although living expenses might go down with the kids out of the house, your travel expenses might rise if you're taking lots of trips to visit the grandkids.

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," Peterson says.

There are no clear rules about how much you'll spend in retirement, because everyone is different. But getting a handle on the line items in your retirement budget can help you determine your retirement "needs, wants and wishes."

Getting Started

One way to get started on your retirement budget is to separate your spending into two buckets: mandatory (your "needs") and discretionary (your "wants and wishes"), and compare them to your expected income in retirement.

  1. Start with the mandatory expenses. Consider your mandatory spending items, such as transportation, clothing, housing and medical costs, and whether they will increase, decrease, or stay the same in retirement. 
  2. Consider your retirement income. Where will the money come from? Include Social Security, pensions, 401(k), IRA or other retirement accounts, annuities, and any other expected income streams. Perhaps you plan to downsize into a smaller, less expensive home and add the proceeds to your nest egg.
  3. Prioritize the discretionary expenses. Once you've estimated your retirement income and factored in the mandatory items, you can move to the discretionary. What items and activities are on your retirement wish list? Travel, activities, and luxury goods, or do you plan to be more of a homebody?    

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

This article Building Your Retirement Budget? Be Realistic and Cash Smart was originally published on January 20, 2017.

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