Here are seven fundamentals to think about before you begin the process of ironing out a retirement budget. Use these tips as a starting point, but consider speaking with a financial planner before you set your budget in stone.
Have a vision
Take time to consider what you want out of life in retirement. What are your goals for retirement? What’s on retirement your bucket list? Consider the kind of housing you want, the lifestyle you want, and your wishes about senior housing and personal care, should they become necessary. If you’re married, make this a communicative process with your spouse.
Don’t forget to factor in all expenses
When you are laying out your budget, make sure you account for all expenses. It’s easy to forget to include random costs such your near-daily latte, or unexpected but inevitable expenses such as auto repairs. The more thoroughly and carefully you consider all of your expenses, the more realistic (and therefore useful) your budget will be.
Over-optimistic expectations and estimates are a surefire way to doom your budget. Plan for modest returns on investments such as stock and real estate instead of expecting a perpetually bull market.
The average rate of inflation in the U.S. over the last few years has been around 2 percent. This means that any investment or account that is earning less than 2 percent in interest is for all practical purposes losing value. Inflation isn’t going to break your budget, but it needs to be factored-in a “cost of doing business”.
Know the phases of retirement
Financial experts often point out that there are distinct phases of retirement. A well-rounded and realistic budget will plan for each phase, allowing for the fact that the precise time that you transition from one phase to another can’t be known:
- From around ages 52 to 62 is pre-retirement, where you’re still working but retirement is in sight. You may have begun to get an understanding of the scope of your nest-egg and retirement income.
- The next phase is early retirement, from around ages 62 to 70. In this phase actual retirement hits. You’ll no longer be getting that steady income from an employer, but, on the other hand, you may begin to see retirement income such as pensions and social security. During this phase, you’ll probably need the most discretionary funds for activities such as travel. On the other hand, most seniors won’t have significant medical expenses or long-term care costs at this point.
- Middle-retirement occurs around ages 70 to 80. By this time, retired seniors will be seeing all of their retirement income, such as social security. It’s a transition period where medical and care expenses may begin to outweigh discretionary spending.
In late retirement, which is from about age 80 onward, the foremost needs for seniors may revolve around senior housing and personal care. Even healthy seniors may see their ability levels decrease at this age. It’s important to plan financially for this stage and the significant costs it can involve. It’s also important to consider that the ages are just rough estimates and that a health problem can catapult retirees to the late retirement stage at any time.
Take advantage of the tools
Fortunately, technology has made budgeting easier than ever. You can safely and securely connect your banking information to budgeting apps like Mint or You Need a Budget to track income and expenses to minimize manual tracking.
- Consider speaking with an unbiased expert
Some tasks are too important and too complex to do alone. As suggested in the introduction, consider working with an independent financial planner before finalizing your budget, particularly if you are seeing trouble spots or unforeseen complexities.