Planning for your retirement? Here are 9 things to consider for your checklist.
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.
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:
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.
Here are nine 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. However, you'll still need to include property taxes and perhaps homeowner association (HOA) fees.
2. Home maintenance. Dishwashers, refrigerators, and other appliances eventually need to be replaced. You probably haven't thought about your 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?
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. 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.
5. General living expenses. Food, utilities, cell phone, Internet, gas, car maintenance, and at least a modicum of entertainment are among the necessities of life.
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. New car purchases. Will you still be driving during your retirement? For how long? Cars eventually wear out and need replacing. Remember to factor in this major expense.
9. Emergency fund. Just like the rainy day/emergency fund that you have during your working years, it’s always wise to prepare for unexpected expenses in your retirement years. For example, health care costs during your retirement could be a complete wild card.
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."
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.
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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