Settling on a retirement budget will put yourself in a place to make smart choices about the retirement lifestyle you want. You may discover trade-offs to enable yourself to retire earlier, travel more, or pursue hobbies.
Step 1: Gather Your Information
First, gather the information you need to create a detailed retirement budget:
- Last two pay stubs (for you and your spouse if married)
- Last 6-12 months of bank statements
- Last 6-12 months of credit card statements
- Last year’s tax return
Review the items above to see where your money is going. Start identifying expenses to group into categories in the following steps.
Step 2: Make a List of Your Reoccurring Expenses
Your budget should list recurring monthly, quarterly, or annual expenses. To create an effective budget, divide your expenses list into three main categories.
- Required Expenses (quarterly/annual) – Property taxes, insurance premiums, car registration, and other required expenses that come up during the year. Calculate these costs on a monthly basis to include in your budget.
- Essential Expenses – Mortgage or rent, utilities, food, clothing, health care and transportation.
- Non-Essential Monthly Expenses – Netflix, gym memberships, cable TV, subscriptions, etc.
Create a budget spreadsheet listing all 12 months at the top and each expense on the far left column. If your cell phone runs $100 per month, put $100 in the cell phone bill row for each month. If you spend $60 for an oil change every three months, distribute this expense throughout the year in even amounts.
Step 3: Budget for Health Care
If your employer has historically paid for your health care premiums, you will need to start paying monthly premiums once you retire. If you retire before age 65, health care premiums can be up to $1,000 per person. Shop around for a health plan before you retire to better estimate your monthly expenses.
Don’t forget hearing, dental, and eye care when planning for health care. Include deductibles, copays, coinsurance, and prescription medications in your monthly estimates. Not planning for health care costs could lead to fast overspending.
Step 4: Don’t Forget About Long Term Care
When planning for health care expenses, don’t forget about the cost of long term care services in your home or a facility. Long term care services can wipe out retirement income and savings quickly in the event of a long term care issue. Include long term care in your budget or transfer your risk by applying for Long Term Care Insurance. Don’t forget to include your premiums in your monthly budget.
Step 5: Include Optional Budget Items
You should plan on having fun in retirement. On your spreadsheet, add optional budget items such as travel, hobbies, entertainment, and all the fun things you enjoy. You may decide to get a smaller home or sell your car to increase your fun budget even more.
Step 6: Calculate Recurring Fixed vs. Optional Expenses
Calculate all your expenses. Then calculate your fixed expenses and divide your fixed expenses by your total expenses.
By seeing how much is left for fun and entertainment, you may cut back on fixed expenses or downsize to create more funds for play. As a general rule, look for ways to reduce your fixed expenses in retirement so you have more funds available to do what you enjoy.