How to Create a Retirement Budget

Finances can cause stress and anxiety. A lot of times people wonder am I going to run out of money? Well our goal today is to walk you through and maybe help simplify your retirement in three easy steps. The first, let’s look at what are you spending? A reminder, this goes well beyond just your basic monthly utilities. A lot of times we’re having conversations and say well, what are your monthly expenses? And people instantly go to well, I got a cell phone. And you know the electricity and this and that. It goes much further beyond that. Look at obviously your typical grocery bill, gas, home, auto insurance. What are those different expenses that really won’t change from when you’re working into retirement? What about then housing? Housing is typically a big expense. Are you planning on moving and relocating to a different area? Are you looking at downsizing? Are you considering buying a second home? A vacation home? What about those things that you’re going to enjoy now that you’re going to have more time in retirement, the leisure activities, different hobbies, the travel? What about health insurance? That tends to be a major factor when people are considering their retirement. I’d encourage you to review your credit card and ultimately look through there. A lot of times they’ll help summarize your expenses to sort of see in different categories how much you’re spending. It would be something to start looking at that, month in and month out to see what that retirement budget might look like. The second piece is going to be looking at your cash flow. Obviously, if you’re no longer working and into retirement, we consider that like okay, what’s the next 20-30 years of unemployment for you going to look like? So you’ve got to factor in Social Security. If you haven’t already go on https://url.us.m.mimecastprotect.com/s/fvI5CmZ09QSGQ6yMSVT4fR5npP?domain=ssa.gov and get set up with an account and then you want to start evaluating when are you going to begin your Social Security benefits? Do you have any type of Pension, whether a lot of times that seems to be if you had a job a number of years ago and they offered some type of Pension. Maybe that was part of your retirement plan. What about do you have a rental property with some income? Or are your considering maybe doing some part-time work in retirement? Lastly, look at your retirement savings. So you’ve built that money up hopefully in 401K, IRA, Roth, whatever it might be and you’ve built up this savings. Now take that figure and say let’s assume a 4%, 5% withdrawal. So if you have say $500K saved for your retirement and you assume I’ll take about 4% a year is the factor there. Okay, that’s about $20K a year. A little over $1500 a month. You’ll want to factor taxes if that’s going to be traditional IRA, 401K. With that, your hope is okay, if I’m making 4%, 5%, 6% return and I’m only drawing out 4%, 5%, 6% then hopefully you’re maintaining that principal over time. Number three, prior to retirement, test out the information that we just talked about. What are your projected expenses? And based on the income that you believe that you’ll have in retirement and see how those two match up. With that, in testing your budget, a lot of times people will commonly talk about well maybe it’s 70%-80% of your current income because you’re no longer contributing to 401K. You don’t have as much in taxes potentially. So if you’re currently just say at $100K of income, you would assume okay, maybe you’re going to be spending $70K-$80K a year. Again, that’s different for everyone. So you want to look at that very cautiously. The trouble areas I would say that you want to be well aware of come down to housing. What are the costs of your home? Do you have your mortgage paid off, which is a great advantage? Or do you need to consider downsizing or potentially relocating? The other area, health insurance. You’re going to be looking at all of these different health care expenses and what that might look like. A big one that comes into play is the eventual long-term care need if that’s a possibility. How do you plan ahead for that? So at Centennial Wealth Advisory we use this system to try and map out what do the next 20, 30, 40 years look like and there’s a lot of different variables to consider. So if you haven’t done that already, we’d encourage you to give us a call. We’d be happy to sit down with you and help build a plan to help you plan to retire well.