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  • Writer's pictureBroderick Mullins, MBA

How do I create a retirement budget that works for me?


How do I create a retirement budget that works for me?

Retirement can be a blissful time of life, but it can also be a period of financial uncertainty.


After all, with no steady paycheck, how do you know if you're on track to cover your expenses?


That's where a retirement budget comes in.


By setting a budget, you can make sure your nest egg lasts as long as you do.


So, let's dive in and explore how to create a retirement budget that works for you.


Assess Your Expenses


First things first, you need to understand how much money you're spending.


It might seem like a no-brainer, but many people don't have a clear idea of where their money is going. To get a handle on your expenses, start by reviewing your current spending habits. If you're like most people, you'll probably find that you're spending more than you realized on things like eating out or buying new clothes.


But how do your expenses change in retirement?


Well, it depends on your lifestyle. For example, if you're used to traveling frequently, you might find that your travel expenses decrease in retirement. Conversely, if you're planning on picking up a new hobby or two, you might need to budget for those expenses. In short, take some time to think through how your expenses might change in retirement.


And don't forget to factor in inflation!


While you might be used to paying a certain amount for groceries or utilities, those costs are likely to increase over time.


So, make sure your budget accounts for rising prices.


Determine Your Sources of Income


Next, you need to know where your money is coming from. For most people, retirement income comes from a combination of sources.


Social Security is one of the most common sources of income for retirees. Depending on your earnings history, you could receive a monthly benefit ranging from a few hundred dollars to several thousand.


Retirement accounts are another source of income for many retirees. If you've been contributing to a 401(k) or IRA throughout your career, you'll likely have a substantial nest egg to draw from in retirement. Pension plans are also a common source of income, although they're becoming less common these days.


If you own rental property, that can be a source of retirement income as well. However, rental income can be unpredictable and may require a lot of work.


Plus, you'll need to budget for property maintenance and repairs.


Calculate Your Retirement Income Shortfall/Surplus


Now that you know your expenses and income sources, it's time to do some math.


Subtract your expenses from your income sources to determine your retirement income shortfall or surplus. Ideally, you want to have more income than expenses. If you have a shortfall, you'll need to either reduce your expenses or find additional sources of income.


For example, let's say you're estimating that you'll need $4,000 per month to cover your expenses in retirement. You expect to receive $2,500 per month from Social Security and $2,000 per month from your retirement accounts. That adds up to $4,500 per month in income, which means you have a surplus of $500 per month.


Of course, not everyone will have a surplus.


Let's say your expenses are the same, but you expect to receive only $2,000 per month from Social Security and $1,500 per month from your retirement accounts. That adds up to $3,500 per month in income, which means you have a shortfall of $500 per month. In this case, you might need to consider downsizing your home, finding a part-time job, or delaying retirement.


Prioritize Your Expenses


Once you've calculated your retirement income shortfall or surplus, it's time to prioritize your expenses. In other words, which expenses are most important to you? This can be a tough decision, as it often involves lifestyle choices and trade-offs.


For example, let's say you're a foodie and love eating out at fancy restaurants. However, you also enjoy traveling and want to take a big trip every year. If you're on a tight budget, you might have to choose between the two. In this case, you might decide that travel is more important to you than dining out, and adjust your budget accordingly.


The same goes for other expenses, like entertainment, hobbies, and healthcare. Think about what's most important to you and prioritize accordingly. That way, you can make sure you're spending your money on the things that bring you the most joy.


Create a Retirement Budget


Now it's time to put everything together and create a retirement budget. You can use a budgeting tool or spreadsheet to help you allocate your income sources to your expenses. Be sure to adjust your expenses as needed to make sure everything balances out.


For example, let's say you've determined that you need $4,000 per month to cover your expenses in retirement. You'll receive $2,500 per month from Social Security and $2,000 per month from your retirement accounts. That adds up to $4,500 per month in income, which means you have a surplus of $500 per month.


You might allocate your income sources as follows:


  • Essential expenses (housing, food, utilities, healthcare): $3,000 per month

  • Discretionary expenses (entertainment, hobbies, travel): $1,000 per month

  • Savings: $500 per month

Of course, your budget will look different depending on your personal situation. The key is to make sure you have enough money to cover your essential expenses, with some wiggle room for discretionary spending and savings.


Monitor and Adjust Your Retirement Budget


Creating a retirement budget is just the first step.


You'll also need to regularly monitor and adjust your budget as needed. Life is unpredictable, and unexpected expenses can throw a wrench in your plans. That's why it's important to review your expenses and income regularly, and make adjustments as needed.


For example, let's say you've been retired for a few years and your healthcare costs have increased. You might need to adjust your budget to allocate more money to healthcare expenses. Or, let's say your investments are performing better than expected and you have a surplus of income. You might decide to splurge on a big vacation or donate to a charity.


In short, be flexible and willing to adjust your budget as needed. That way, you can make sure your retirement savings last as long as you do.


Conclusion


Creating a retirement budget can be daunting, but it's an essential step in ensuring your financial security in retirement.


By assessing your expenses, determining your sources of income, calculating your retirement income shortfall/surplus, prioritizing your expenses, and creating a retirement budget, you can make sure you're on track to cover your expenses in retirement.


And remember, be flexible and willing to adjust your budget as needed. Retirement should be a time of enjoyment, not stress!

 

Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view.

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