Planning a retirement budget is something you should think about well before you retire. Inflation, investment rates of return, your retirement date, part-time earnings, Social Security benefits and pensions all affect your retirement income. So put your retirement budget at the top of your to-do list with our simple 4-step preretirement plan below.
- Determine Your Fixed Retirement Expenses and Place Them Into Categories. Your retirement expenses may change depending upon what stage of retirement you’re in. For example, you’ll probably spend less money on car payments but may spend more money on travel. You may move into a seniors’ residence, so less money is needed for home repairs or property taxes. Regularly review your monthly expenses and sources of income to see where you can cut costs to increase retirement savings. Stick to a spending plan and—as a general rule of thumb—find ways to lower your fixed expenses so you have more flexible funds available. To start, divide your retirement expenses into these categories:
- Fixed Essential Expenses: Food, clothing, housing, utilities, transportation and health care
- Non-Fixed Monthly Expenses: Things you receive a monthly bill for, such as cable TV, gym memberships, cell phone plans or other subscriptions
- Required Non-Monthly Expenses: Bills for property taxes and insurance premiums may arrive just once per year. Add these together, divide by 12 and include this figure in your retirement budget.
- Account for Health Care. According to Investopedia, the money we’re spending on health care is increasing at a faster rate than the money we spend for other things. This is especially true for older individuals with different health care needs. Before retirement, don’t forget about your long-term care and health care costs. If your former employer was paying your health insurance premiums before retirement, this will soon become your responsibility. If retiring before the age of 65, you'll need to explore your options for health care coverage before your Medicare starts.
- Grow Your Contributions. If you’ve designated a percentage of your income toward an employer-sponsored retirement plan, or you’ve settled on a target for annual IRA contributions, revisit your contribution amount whenever your financial situation changes. Aim to make contributions equal to 10-15% of your annual income—or whatever target you’ve set for yourself—to reach your ultimate retirement savings goal.
- Don’t Forget the Fun. Discretionary spending includes all the things you’ve been looking forward to in retirement, such as travel, time with the grandkids and other entertainment. Monitor your discretionary spending on your credit card to give yourself an idea of how much you like to spend on fun now so that you’ll know how much to save for your fun bucket in retirement.
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.