Best Budgeting Practices for Retirement

Creating a budget for retirement is the best way to manage your savings and retirement income. Although planning a budget takes time, the benefits of using your money wisely through a well thought out plan are immense.

Sticking to a budget will help you create a great amount of savings, make your income last longer and help your retirement experience remain stress-free. Running out of money when there are bills to pay, health services needed or sudden emergency expenses can be extremely stressful for retired seniors.

Consult the following sections to learn more about how to effectively budget for retirement. You can begin this process as early as needed, but keep in mind, there are certain factors about your future retirement that can be difficult to predict. Inflation, age of retirement, investment profits, taxes and Social Security income are just some of the areas that could affect a budget plan.

Determine Fixed and Non-Essential Expenses

In order to create a budget that fits your specific personal and financial situation, the first step is determining your fixed expenses during retirement. Your fixed expense amount is how much you anticipate having to pay to cover your cost of living or the most essential items for you to survive. Food, clothing, housing, transportation and health care are considered fixed expenses.

When determining cost of health care for retirement, you should consider the changes that may occur in your medical expenses at an older age. Estimating your life expectancy is beneficial to more accurately calculate health care costs. You should also include dental, eye care and hearing expenses during retirement.

Non-essential recurring obligations, such as monthly cable, internet, gym memberships and other subscriptions can also be included when calculating expenses. It is helpful to create a budget spreadsheet listing the 12 months of the year and detailing the expenses as they apply for each month.

Next, determine your estimated retirement income in order to develop a working budget.

Determine Retirement Income Amount

You can calculate your estimated retirement income amount by adding together every source of income you will receive as a retired senior. While you may only be able to come up with estimates for these numbers, having a general income amount in mind is beneficial in determining whether you can cover your essential cost of living each month of retirement.

Income sources to consider include Social Security payments, investments, annuities, part-time or full-time employment paychecks and any other forms of income you anticipate having during retirement. Add these sources together to calculate your estimated monthly income amount as a retiree.

Use Income and Expenses to Formulate Budget

Use your estimated monthly income and expense amount to determine whether you will have enough money to cover your expenses for a prolonged period of retirement. If your monthly income is higher than your monthly expense amount, then any money left over can be used for travel, hobbies, entertainment or savings.

Once your initial budget calculations have been made, you can make adjustments to your retirement budget as needed. You can remove unnecessary expenses, add newfound expenses and increase or decrease your income amount as your finances change over time. When you have reached a budget that works with your retirement plans, prepare to implement the budget as you transition into your period of retirement.

Test Your Budget

Testing your budget is a good way to determine whether your financial plan is going to work during retirement. There are different ways you can test out your budget to see how effective the plan will be when you are retired and/or make necessary improvements. Because your budget is evolving until you finally reach retirement, participating in practices that will improve the accuracy of your financial plan is beneficial. The following two methods can be used to give your retirement budget an early test.

Extended Vacation Test

One option for testing your budget is taking an extended vacation to practice what it would be like living as a retiree. This is especially helpful if you plan on retiring abroad. Think of this vacation as a practice run for your budget, and consider whether it truly accounts for everything you need. First, from your calculated overall budget, determine how much your income would be monthly. Withdraw this amount and take a vacation for a month, using only the cash withdrawn for the essential and non-essential expenses in your budget.

This practice run will help you determine if your retirement income is enough to cover your basic cost of living during retirement. Depending on how close you are to retirement, this practice may not account for the changes in expenses you could experience as a retiree.

If you are nearing your planned retirement age, then the results of this test could indicate whether you are on the path to retiring early or later than planned. For example, if your budget was more than enough, then you may have the option of retiring early in the future. If your budget was not sufficient, then it is possible that retiring later than you planned could be necessary to bridge the income gap. Learn more about saving for retirement later in life here.

Retirement Month Test

Another way to improve your budget is to live a certain month as if you are already retired. This test provides a more comprehensive assessment of how well your budget fits your future lifestyle as a retired senior. Pretending you are already retired allows you to find out what extra costs you could incur as a retiree that you have not yet thought about.

During this month, get involved in any projects that you might be interested in as a retiree. For example, you may participate in volunteering, hobbies and/or learning new skills. Factor in the cost of these new activities, especially those that would last for an extended period of time. Activities that would only affect your budget for small periods of the year are less impactful on your overall financial plan.

During this practice, avoid interaction with coworkers, as retirement typically results in a change of social circles that leads to new activities that require a different budget. Assessing what costs might replace the usual time and energy expended at your job can give you an idea of the extra costs that should be accounted for in your future budget.

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