As people get closer to retirement, they tend to get very nervous about the prospect of trying to survive on a lower income. It doesn’t have to be that way: retirement should be a celebration of the golden years after a lifetime of hard work and service. It should not be filled with anxiety and worry about making ends meet. To that end, it is imperative to budget properly in the years leading up to retirement.
As a general rule of thumb, financial planners suggest you either have an established monthly budget plan before you retire, or create a retirement lifestyle that allows you to live on 70 to 80 percent of what you earned annually before retiring. The former strategy is more likely for most people since it involves simplifying your spending habits, something that many seniors can reasonably do.
To see if your budget is feasible, plan for the first year and try to stick to this religiously. Then, adjust as necessary as you settle into the second year of retirement. To do this, first determine which of your expenses are going to continue and which will not. If the children are out of the house, obviously that’s an expense you needn’t worry about. If you are moving into a smaller home, consider that as housing tends to be one of the largest monthly expenses.
List out all of your expenses and then put them into three categories:
- Essential Monthly Bills
- Essential Irregular Bills (for annual dues, property taxes, etc.)
- Non-Essential Bills
When you look at your essential bills, make sure you factor in for changes to your healthcare. Over time, this will eclipse housing as the biggest expense, so it is critical to be realistic about this up front. Once you know how much is essential, then it is possible to start looking at which non-essential expenses you will have money for; this will give you an idea of how much you can spend on things like entertainment and travel.
When creating a retirement budget, it is extremely important to be realistic about how long your retirement savings will last and creating a suitable lifestyle. Failure to do so will quickly change the dream of a comfortable retirement into the nightmare of needing a job. The best way to approach retirement is to plan appropriately for it.