5 Steps To Creating Your Retirement Budget

Preparing for retirement is a career-long endeavor requiring a lot of planning and saving over many years. For most of that time, we use some form of a retirement calculator to see how we are tracking in terms of being able to replace 75-80% of our pre-retirement income. But once we reach 5-10 years out from retirement, we need to focus on our specific expenses in retirement and make sure our income sources are adequate to meet those needs. That’s where having a retirement budget comes into play.

Making sure we live below our means does not lose importance once we decide to call it a career. If anything, understanding our expenses becomes more important than ever in retirement. Taking time to think through your expenses in retirement will help insure you can do all the things you have planned and that your money lasts for the long run.

Step 1 – What are you spending now?

The best way to start is to look at what you are spending now. This gives you a baseline to work from.

Step 2 – What will your lifestyle look like in retirement?

Thinking through how you want to spend your time and what that may cost is important to factor into your budget. Try to be as specific as you can. Some examples include:

  • Travel – Many retirees plan to travel more, especially in the early portion of retirement. But what does that look like for you? Is it travelling the world? Loading up the RV and hitting the road? Or maybe something in between?
  • Housing – This is a biggie. Do you plan to stay in your current home when you retire? Are you planning to relocate to a warmer climate or to be closer to family? Maybe you want to downsize to a smaller home.
  • Hobbies and entertainment – How you spend your time can impact your budget. If you want to play more golf for instance, does that include a club membership? If you decide to take up a new hobby, what will that mean for your spending?

Step 3 – Going up or down?

Most retirees find they don’t spend more when they retire. But every case is different, and you may find you may not spend much less once you retire. Some expenses will go up in retirement – health care as we age (click here for help with how to estimate those costs), perhaps your entertainment spending (travel, dining out, etc.). Other categories of spending may go down. Perhaps you intend to pay off your home, which would have a significant impact on your cash flow.

Certainly, things like 401(k) or other retirement account savings will stop, as will payroll taxes (assuming you are not working part time into retirement). Adjusting these categories based on how they may change will crystallize your expenses.

Step 4 – Monitor and adjust

Your expenses are likely to change throughout retirement, so it is important to monitor your spending and adjust your budget periodically. Many find that as they age in retirement, items like travel will decrease over time, while health care expenses increase.

Step 5 – Structure your nest egg

Once you have your expenses documented, consider having 5 years’ worth of those expenses available in cash or other safe vehicles. Having next month’s housing or grocery money invested in the stock market can leave you in a bad position if the market enters a downturn. Keeping your short-term funds safe will ensure the money is there when you need it.

Having other funds invested for income and still others invested for growth will help replenish the cash you spend and still provide the longevity your nest egg needs for the long haul.

Having a detailed budget in place 5-10 years out will allow you to adjust while you are still working (if necessary). This planning will set you up to enjoy the lifestyle you want during your retirement!

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