If you’re approaching retirement, you’re probably focused on one big question: Do I have enough saved? But once retirement begins, a different challenge takes over. You need to learn how to effectively manage your money on a monthly basis without a paycheck coming in. With proper budgeting in retirement, you can reduce your chances of over- or underspending and better enjoy this time in your life.
Why Budgeting in Retirement Is Important
Longer lifespans have made it harder than ever to figure out how much money you can safely spend each year after you stop working. Your savings may need to last 30 years.
Too often, people run out of money because they spend too much in the early years of retirement. Others underspend out of fear of going broke, forgoing purchases and activities that would make their retirement easier or more enjoyable. To minimize these risks, it’s crucial to actively manage both your daily finances and long-term savings and investments throughout retirement.
The first step is to create a budget so you can plan your spending, identify problems before they become serious, and ease your worries. Budgeting is essential because you no longer have steady work income, and retirement expenses can be unpredictable. You must rethink your cost of living.
Identify Your Expenses
First, detail all of your expenses over the last 6 months, including fixed costs (e.g., housing, utilities, taxes, insurance) and variable costs (e.g., groceries, transportation, home/car maintenance, entertainment) to give you a baseline. Remember that some of these will go up with inflation every year.
Next, factor in what costs will increase or decrease with retirement. For example, you will no longer have to commute to work, but you may decide to travel more. You may want to downsize or relocate to reduce costs, but give that money to your grandchildren for college. Health care and long-term care are particularly important considerations. Educate yourself on Medicare and other insurance plans and consider buying long-term care insurance if you can afford it.
Most importantly, your budget should set aside enough cash to cover 6 to 9 months of living expenses in an emergency fund. This protects you from being forced to sell investments at a bad time or accumulate debt to cover unexpected costs.
Determine Your Income
Next, verify or project your monthly income from Social Security, pensions, required minimum distributions, and other sources. A financial advisor can help you calculate how much income your investments are likely to generate annually.
If your income is not enough to pay your expenses, you have several options. You will either have to withdraw additional funds from your savings, sell off investments, reduce expenses, or increase your income by going back to work. Which action to take depends on your circumstances.
Before you withdraw more money or sell off investments, talk to a financial advisor and accountant so you understand the full tax, Medicare, and financial implications. An advisor can also help you calculate an appropriate withdrawal rate every year and invest your money appropriately to protect your savings from downturns in the market.
If you want to reduce expenses, start with discretionary expenses. These are costs that are not necessary to live, but provide comfort, joy, or convenience (e.g., vacation, entertainment, subscriptions, gifts to loved ones). You don’t want to live so frugally that you constantly feel deprived, but there may be things you’re paying for that you could cut. A budget helps you prioritize what is truly important to you.
To earn more, many retirees are returning to the workforce part-time or even full-time or starting businesses. If you’re healthy, you may want to consider this.
Repeat and Revise Regularly
A budget isn’t one and done. As you age, your income, expenses, health, and financial needs may change. You want to update your budget accordingly. Having a process in place makes adjustments much easier.
The point of all this is to give you peace of mind. Knowing what is coming in and going out and that you are living within your means allows you to better enjoy your retirement. If you don’t have enough money, a budget helps you take control and improve the situation before it gets worse.
For some retirees, keeping up with daily financial tasks can be challenging. As a daily money manager, I assist clients with:
- Budgeting
- Bill paying
- Account monitoring
- Tracking spending
- Organizing paperwork
- Coordinating with financial professionals
I teach clients what to do or handle any tasks they don’t have the time or inclination to do.
Retirement should feel secure, not stressful. If managing your day-to-day finances feels overwhelming, I’m here to help. Contact me for a free consultation.
