We all spend many years saving for our retirement, so once we reach that age we can relax and enjoy without having to stress over money. But creating a retirement budget is important if you want your retirement fund to last for decades.
Planning your finances by creating a retirement budget will improve the way you use your money, making the most out of it. With a well-crafted plan, you will most likely be able to afford all your expenses and yet have plenty of room for fun.
There are a few things you need to consider to create your retirement budget, but once you sort it out, you also improve your peace of mind. A common mistake many retirees make is spending too much, too soon.
Determine your fixed expenses
The first step to create a retirement budget is to find your fixed expenses. Find your bank account statements for the last 6 or 12 months, your credit card statements for the last 6 or 12 months, the last two pay stubs (if you or your spouse is still employed), and your last year’s return tax. Compare all these documents to find any recurring expenses, whether they are monthly, quarterly or annual payments.
You can use highlighters to group your expenses as follows:
Essential spending, like food, housing, utilities, transportation and health care
Non-essential monthly expenses, like TV cable bill, gym membership, cell phone plan or any other subscription
Required non-monthly expenses, such as property tax, insurance premiums, auto registration and any other annual payment. Add all of these up and divide by 12, so you can include it in your monthly budget.
Once you have determined all these expenses, create a spreadsheet and add each expense each month so you can visualize what bills or payments you need to cover from January to December. Add up all the items for each month and you’ll get your monthly fixed costs.
If you retire before 65, you’ll need to find a health insurance before Medicare kicks in. Include this in your budget. Don’t forget about dental, vision and hearing care. Estimate your health plan expenses as well as the cost of medication and include it in your budget.
‘All work and no fun’? Definitely NOT!
Every budget has a flexible part, and that is the fun part: of course that your budget will include money for fun activities such as travel, sports, or entertainment. Think of all the activities you enjoy doing and how frequently you’d like to do them.
If you like to go out for dinner, estimate a monthly cost for that and include it in your budget under the Flexible category.
Now that you have all this information, you need to determine what percentage of your retirement income will go towards fixed expenses and how much is left for flexible expenses.
To do this, you need to total your fixed expenses, total your non-fixed and flexible expenses separately and divide your fixed expenses into your total expenses.