How to create the ultimate retirement budget

Couple reading retirement plan

Retirement planning is an exercise in planning your cash flow. Yes, the size of your nest egg matters. Of course, you have to consider certain risks. But the bulk of retirement planning comes down to understanding how you’ll cover your spending during retirement. That’s why the Retirement Budget Calculator is so important. It helps everyday people start planning their dream retirement. You can watch a quick video on how to use the Retirement Budget Calculator here.

To create a sound retirement plan, retirees need to understand their income and expenses. That means they need a budget. A retirement budget will help you live your retirement lifestyle without financial stress

So how do you build a retirement budget that gives you freedom instead of restrictions? This guide will show you how you can create the ultimate retirement budget. With an established budget, you can gain peace of mind that your retirement plan will work.

Getting past your hangups, so you can start your ultimate retirement budget

Of course, knowing that you can (and should) create an ultimate retirement budget doesn’t mean you will. You might have hang-ups stopping you from creating your plan. These are a few of the most common budgeting hang-ups.

What about one-off events?

The biggest hangup that prevents people from starting a retirement budget to do with “one off events.” Every month of your retirement will look different than the month before. Some months, you’ll spend a lot of time at home, doing projects around the house and volunteering. Other months, you’ll take road trips or vacations with your kids and grand kids. Some months you’ll host lots of people, but others you’ll get to enjoy the hospitality of your friends.

With so much variability, it may seem impossible to create a monthly budget. However, I still encourage people to start their retirement planning with a budget. It’s the easiest way for people to understand their retirement income needs. Plus, a monthly budget isn’t so difficult to understand. Most fixed expenses (such as insurance payments, utilities, medical needs, debt repayment, etc.) will come due each and every month. These expenses won’t suddenly stop once you retire.

Even though the rest of your expenses will vary from day to day and month to month, the ultimate retirement budget can help you account for those expenses too. Do you plan to take two vacations each year during retirement? If those vacations will cost $6000 on top of your recurring expenses, you’ll need to plan a $500 monthly travel budget.

The same logic applies to all sorts of things. You don’t know exactly how much you’ll spend on home maintenance, but you can expect a few things to need repairs each year. Your repair bills over the last few years, are a good guide to how much you’ll spend on home maintenance in the next few years.

Some budget categories can be difficult to estimate. For example, you may not know how to estimate your health related expenses during retirement. After all, nobody plans on struggling with high cholesterol or skin cancer. For less predictable expenses, you may want to work with a financial adviser to estimate the costs.

Budgeting in retirement does not mean penny pinching

For most people, getting on a budget sounds about as appealing as going on a diet. Most people have tried and failed at both. However, the ultimate retirement budget isn’t about “crash budgeting.” You control how much money you put towards each category. The Retirement Budget Calculator will help you stay within your income, but you control the spending.

When you know you can cover your needs, you have complete freedom to decide how to use leftover money. You can give more to charity, travel more, or spend more on your hobbies. Your spending is up to you!

I know I won’t like what I find

If you’ve struggled to save money in the past, you may think you’re retirement nest egg is too small. You may even suspect that you’ll have to drastically change your habits to make ends meet during retirement.

But, if you suspect you don’t have enough money to retire, that’s even more of a reason to create your retirement budget. If you’re still working, you still have time to augment your savings and change your habits. You can work to eliminate debts like a car loan or a mortgage payment while you still have a high income. Just removing some big expenses can set you up for an even better retirement.

Retirement planning starts with understanding your income

When you build the ultimate retirement budget, you need to start by understanding your income. The Retirement Budget Calculator helps retirees take a detailed look at their different sources of income.

Of course, most retirees will claim Social Security, but that isn’t the only source of income to consider. Some retirees can count on pensions or annuities. Others may have income from rental properties. You may plan to take spend some of your retirement savings each year, or you may continue to work on a part-time basis for several more years.

If you’re not sure how to plan out your retirement income, consider meeting with a financial adviser. An adviser that specializes in retirement planning can help you take a detailed look at your income options during retirement.

The seven spending categories every retirement budget needs

Of course, reviewing your income is only one half of the retirement budgeting process. You’ll also need to take a detailed look at your spending. The Retirement Budget Calculator splits spending into seven important categories that everyone will recognize. It also gives you a detailed line-items, so you don’t forget any important details.

Watch this video to see how the Retirement Budget Calculator works, or read about the seven budget categories below.

Housing

You might pay off your mortgage before retiring (congratulations!), but that doesn’t mean you have no housing expenses. You still have to pay taxes, insurance and maintenance on your property. Plus, you’ll need to pay for heating, electricity, water and other utilities.

Within the Retirement Budget Calculator, you’ll see typical housing expenses broken down line by line so you can easily estimate your monthly costs. Use your current spending patterns to figure out how much you can expect to spend on these expenses during retirement.

Loans and liabilities

Although most people try to pay off their debts prior to retirement, it’s common to go into retirement with at least a few liabilities. For example, you may still be making payment on an RV or towing truck. Some retirees will have a house payment for a few years during their retirement too. Any required alimony or child support payments fall into this category.

Even if you don’t owe any money, you may want to help a child or grandchild repay their debts. For example, a grandparent may put $100 per month towards a grandchild’s student loan repayments. By accounting for these payments in this category, you can better predict your retirement budget.

Food and personal care

One area that’s unlikely to change much after retirement is your spending on food and personal care. This category includes everything from groceries to gym memberships. Even clothing, acupuncture, and nutritional supplement expenses should be included here. With so many line items, you’ll want to check The Retirement Budget Calculator to see if you’ve missed anything.

Use your current spending habits to predict your food and personal care expenses during retirement. Sure, you’ll spend a little less on coffee or lunches out, but you’ll probably spend a bit more money taking the whole family out for dinner once in a while.

Insurance and medical costs

For many retirees, insurance and medical costs can eat up a huge portion of their budget. Of course, you’ll need to include insurance policies like your homeowners or auto insurance policy in this category. But you’ll also want to think more broadly. Have you purchased a long-term care insurance policy, or do you need to add one soon? Will you continue to pay for life insurance or disability insurance during retirement? What about dental insurance?

The most difficult to predict category may be your health insurance related costs. In most cases, Medicare covers part of health insurance needs, but it doesn’t cover everything. You’ll still have to pay out of pocket for medications, supplemental insurance, and other medical needs.

Adding a line for “out of pocket” medical spending can make a ton of sense. How much money should you put towards out of pocket medical spending? The answer depends on your situation. One method is to divide your health insurance deductible by twelve. For example a couple with a $2400 health insurance deductible can plan on $200 per month in out of pocket expenses. As long as you don’t meet your deductible each year, this method gives you a buffer in your health spending. The buffer will help you cover expenses if you have to pay for a surgery or another major expense later on.

Transportation

You’re probably looking forward to ditching your daily commute during retirement, but that doesn’t mean you’ll ditch your car altogether. You may see some lower costs, but your might also spend more. After all, you may take more road trips or spend more time driving to different activities.

To account for these costs, you’ll want to price out all your annual costs of driving including taxes and tags, oil changes and maintenance, fuel and more. If you take public transportation or use taxis or ride-sharing services, you’ll want to include those costs here too.

Travel and entertainment

One of the most exciting parts of every retiree’s budget is the travel and entertainment sections. You’ll finally have more time to take trips, camp, or pursue hobbies you care about. This is one budget category that you don’t want to forget to fund.

So what expenses should you put into this category? The Retirement Budget Calculator offers several line items including vacations, presents for Christmas, birthdays and anniversaries, software subscriptions, hobby and lesson spending, newspaper or magazine subscriptions and more. Of course, you’ll want to customize this section for your needs. If you’re an avid gardener, you may want to include lines for seeds, tools, and materials. You may want to add hunting and fishing licenses (and equipment) into this category too.

Giving and other miscellaneous expenses

Aspiring retirees that built charitable giving into their budget during their working years may want to continue giving at a similar rate during retirement. Of course, if your retirement income is much lower than your working income, you may want to revisit this category.

If you’ve prepared well for retirement, you may find that your budget has a lot of room for giving. That can be exciting for retirees who want to put their money towards a good cause during their lifetime.

This category is also a good catch-all for expenses that don’t have a place anywhere else. For example, you might add lines for tax preparation or financial advising services here.

Want help creating your retirement budget?

The Retirement Budget Calculator can help everyone create their ultimate retirement budget. It will help you cut back on spending you don’t care about, to put more resources towards the things that matter to you.

If you want extra help setting up the budget, consider working with a fee-based financial adviser. They can help you understand the options you have available.

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