Budgeting in Retirement

Budgeting in Retirement

Today we’re going to dive into budgeting in retirement, talking about steps for creating a retirement budget and factors to consider when doing so. Experts suggest planning to replace about 70 to 80% of your pre-retirement income to maintain your lifestyle. This is why budgeting in retirement is important, and it can help provide a clear financial roadmap to ensure you don’t outlive your savings.

A good retirement budget doesn’t take the fun out of life. It gives. It simply gives you the confidence to enjoy the years that you’ve worked so hard for. So the first step in creating a retirement budget is to calculate your income. Now, prior to retirement, you may have been used to receiving one steady paycheck, whereas in retirement you typically have multiple sources of income.

Examples of these might include Social Security, pension payments, withdrawals from retirement accounts like 401(k)s and IRAs, and then possibly part time work. Your retirement budget should be built around your total monthly income. Now, after you calculate your income, you need to figure out your expenses. There are two types of expenses, essential and discretionary. Essential expenses are things that you need to pay for every month.

And one of the biggest of these is housing. Even if your mortgage is paid off, you’ll need to consider the cost of property taxes, insurance, HOA fees and maintenance And other essential expenses are things like health care premiums, utilities, groceries, debt payments, and transportation costs. The discretionary expenses are those non-essential purchases often considered wants. These expenses may include the cost of travel, eating out, memberships, entertainment and gifts.

Now, if you regularly tithe or give monetary donations, make sure to include that on your monthly budget as well. Tracking your expenses for a few months gives you a realistic picture of what you actually spend, not what you think you spend. And that makes your retirement budget far more accurate. Now, when considering your retirement budget, it’s also important to account for inflation.

Now, health care costs tend to rise faster than general inflation, so consider building room in your budget for those increasing premiums. And then, even in retirement, life can throw unwanted surprises your way, like maybe a major home repair, a medical bill, or family needs. Keeping an emergency fund is a great way to cover these sudden, unexpected expenses. Now, most experts suggest having 3 to 6 months of essential expenses set aside, kept in an easily accessible account.

Now, this cushion keeps you from dipping into your retirement investments at the wrong time, especially during market downturns. So then, once you know your income and expenses, your next step is determining how to pull from your savings, if you even need to. Your pension or Social Security might be enough to cover your monthly needs. So you may only need to pull from your retirement savings to do the fun stuff, or make those larger purchases before withdrawing from your retirement savings.

Make sure to consider those tax implications of your withdrawals. Withdrawals from different accounts, Roth, traditional IRAs, taxable investments, are all taxed differently. So additionally, look at your withdrawal rate. The traditional 4% rule is only a guideline. Market conditions and personal needs may require adjustments. And speaking of adjustments, the last step is to review and adjust your budget regularly.

A budget is a one is not a one time setup. It needs to be a living document. Review your budget and spending habits every month to ensure they still align with your goals and financial situation. In one season of life, your budget may include more travel and hobbies, whereas in another season your budget may be heavier on shopping or car repairs.

Now, if this also sounds overwhelming, you don’t have to do it alone. A qualified financial planner can help. And then that’s where we come in. At Centennial Wealth Advisory, we have a program that can sort through your income sources, identify gaps, and help create a retirement roadmap that fits your lifestyle and long term goals. Our dedicated team can assist in figuring out when and where to withdraw your retirement money, how to minimize taxes and make your savings last.

We also have professionals in all of our Northern Michigan offices who can help navigate through health care, Medicare, and the costs associated with it. Retirement should be a time to enjoy your life. Your budget is simply the tool that helps make help, that helps makes that possible. We’d love the opportunity to help navigate you through this new phase.

If you would like to meet with one of our advisors who can help assist with your retirement budget, give us a call for a free, no cost consultation so we can help you plan to retire well.