There are many different ways financial professionals advise you to create a retirement budget. In fact, experts recommend helpful lists that contain from 5 to about 100 categories (seriously) that you can use to find your magic number. The fact is, finding that number depends on your unique situation—and no one’s situations is the same.
So, you will have to do a bit of leg-work to determine what your anticipated expenses will be when you retire. A general guide is to expect them to be about 70-80% of what your expenses are today. But, the work isn’t over with just establishing that number. Next comes creating a retirement budget and being disciplined enough to adhere to it. Even then it can fluctuate every year depending on your lifestyle, goals, and expenses between now and the day you retire.
Why is creating a retirement budget important? Well, Social Security does not provide enough to live on. And, unless you have a fantastic employer-sponsored plan, you’re probably going to have to rely on yourself. Either way, most of what you have to spend in your golden years depends on how much you save in your younger years.
With that in mind, it’s obvious why developing a retirement savings budget early on is crucial. Once you have an idea of what you’ll need when you retire, you can trim the fat off your current expenses and begin saving for the future.
Here are a few of the most important steps to get you started creating a retirement budget:
1. Evaluate your current income and expenses. While you’re doing that, go ahead and divide your expenses into wants and needs. You’d be surprised how many of your “needs” actually fall into your “want” category. And, this is where you’ll find some extra cash to stash away for retirement. Use this retirement calculator to help estimate the expenses you’ll have when you retire.
2. Analyze your expenses, again. The more you monitor expenses, the better your chances are of deciding which ones you can cut. Analyzing over a period of time can help you predict what your expenses in retirement may be. For example, paying off a car or your mortgage before you retire can cause a significant increase in your cash flow. The same as purchasing either in retirement can increase your expenses. Your health care (insurance vs. Medicare) may fluctuate in one direction or another and so can your health as you age. Keeping track can help you adjust your savings budget as needed to reach your goal.
3. Now figure in incidentals. These are comprised of lifestyle expenses (movies, traveling, etc.) that are important to you. A bit different than your expense category, incidentals include activities you enjoy and that you plan to continue (or start!) when you retire. These are essential to define because they increase the expense list in your retirement and help you determine all of your needs and goals and what they’ll cost you.
4. Account for inflation and increasing health care costs. It’s hard to predict the future, but, try your best here. Inflation is going to happen. Your health care expenses are probably going to rise as you age, and upon retirement, any employer insurance plan ends. While Medicare helps, so will a solid plan to cover medical costs when they arise.
5. Consider downsizing now. Depending on when you plan to retire, downsizing now can help you save a substantial chunk of change. If you’ve established enough equity in your current home, profit from its sale can help jump-start your savings budget.
6. Establish a solid emergency fund. Emergencies do arise, after all. So, along with saving for retirement, you want to save for unplanned expenses. You should have an emergency fund for the here and now, but you also need one in your retirement years. Saving now helps buffer the financial impact these emergencies cause, which can impact your ability to stick to your budget. Also, continuing an emergency fund when you retire can prevent the depletion of your hard-earned retirement savings when unforeseen needs arise.
7. Look into estate planning. If you plan to build enough wealth to leave to your loved ones, you’ll want to budget for that, too. Consult with a financial advisor or wealth planner to determine your best course of action here. A well-structured estate or trust can make things easier and less complicated for you and your heirs.
Pantheon Wealth Planning understands how fluid and ever-changing life can be. We help our clients navigate the complexities of living expenses today and to prepare for successful futures. Our process for financial planning and tax investment strategies assists our clients in planning, budgeting, and reaching their potential to realize their goals. If you have any questions about this article, please feel free to contact us. We are happy to discuss creating a retirement budget with you and to help you find a process that suits you best.