Planning your finances by using a retirement budget can lead to more fun in your golden years. By having a plan, you’ll have less stress, and making a retirement budget helps you avoid one of the biggest retirement mistakes people make of spending too much of their nest egg too soon.
With just few steps, you can develop a budget that helps you plan for the financial changes and events you’ll experience as you enjoy your retirement.
Importance
Of the many factors that affect your retirement income (inflation, rate of return on savings and investments, your retirement date, taxes, spending, part-time earnings, social security, pensions, and more) you have the most control over one critical factor: Your spending. In retirement, over-spending can become financially dangerous.
Creating your best budget
Start by gathering the following items:
Your last 6 to 12 months’ worth of bank account statements. Your last 6 to 12 months’ worth of credit card statements. If still employed, last two pay stubs for you (and your spouse if married) 10 to 12 colored highlighter marking pens.
Last year’s tax return
Review the transactions on your bank account and credit card statements to track where you have spent your money over time, and use the highlighter pens to group expenses into different-coloured categories by following the steps below.
Step 1: Your fixed expenses
Start your budget by listing all your recurring monthly, quarterly or annual payments. To make an effective retirement budget, break this list down into three parts:
Essentials: This includes food, clothing, housing, transportation, and healthcare.
Non-essential monthly obligations: Although we all may think of cable TV and streaming services as an essential, they aren’t. Non-essentials include things like cable, gym memberships, subscriptions, and other items for which you receive bills.
Required non-monthly expenses: Items like property taxes, insurance premiums, auto registration and home warranties may come up once a year. Add up these periodic expenses and divide by 12 to calculate their cost on a monthly basis to include in your retirement budget. To account for the timing of expenses, use lined paper or a computer spreadsheet program to make a budget chart spreadsheet for the calendar year. List the months of January to December across the top in separate columns. Down the vertical side of the spreadsheet, list each expense on a separate line.
If your utility bill runs an average of $200 a month (about N72,000), put $200 (N72,000) in each monthly column. For Christmas gifts, if you spend about $500 (about N180,000) a year, divide the $500 in two and put half each in November and December. Do this for each expense item, then total up each month.
Step 2: Changing healthcare costs
If your employer has been paying your health insurance premiums, once retired you may have to pick up the tab. If you retire prior to reaching age 65, health premiums will be expensive. Between the ages of 60 and 65, before you become eligible for Medicare, health insurance premiums could run $1,000 (about N360,000) a month per person. Shop for plans now so you can add an estimate of that monthly expense into your budget. Don’t forget about dental, eye care, and hearing. Add those expenses to your budget too. Add in estimates for health care costs in retirement in order to develop a realistic expectation of how much you’ll need to live on each year. Getting this item wrong is one of the seven deadly retirement budget killers that can wreak havoc on your retirement plan.
Step 3: Optional items
This includes all the fun stuff, like travel, grandkid outings, sports, and other entertainment.
Step 4: Plan how you’ll spend your time
Consider how your hobbies and lifestyle may change, as this could affect the way you spend. If married, ask your spouse to do this also.
If you have expensive hobbies, you’ll need to budget more for those. Begin to think about changes you may be willing to make that would reallocate money from items that are less important to items that are more important. For example, if you want to travel more, would you be willing to downsize and live in a smaller house?