Financial Advisor in Raleigh NC: Budgeting in Retirement

Planning for your life after work is crucial, and retirement budgeting plays a significant role in this process. Although it may not be the most thrilling aspect of retirement, it is still essential. Alongside devising an income plan that ensures a consistent "retirement paycheck" and formulating an investment strategy that facilitates growth of a portion of your savings, establishing a realistic budget is a fundamental step towards a successful retirement.

If you're prepared to embark on the journey of creating a retirement budget, here are some valuable tips to assist you.

The Big Picture

The budgeting process often encounters a roadblock for many individuals right from the start. This is frequently due to excessive concern over the intricate details of discretionary spending, rather than taking a holistic approach. To overcome this hurdle, begin by gaining a comprehensive understanding of your essential expenses, and explore how guaranteed sources of income like Social Security, pensions, and annuities can cover them.

Next, create a flexible budget by categorizing your spending, like travel, gifts, and entertainment, instead of tracking every dollar. A helpful strategy is to align these nice-to-have expenses with the income derived from individual retirement accounts (IRAs) and other tax-deferred retirement savings accounts.

Get Organized

Take proactive measures and envision the retirement lifestyle you desire, based on your financial means. It's crucial to have a clear understanding of your recent spending habits and evaluate whether your overall expenses will increase, decrease, or remain consistent during retirement.

To commence the process, compile a record of your average monthly expenses, such as cable, telephone, and electricity bills, and determine the inflow and outflow of your finances. If you utilize credit cards, access your year-end summaries online to identify areas where you spent the most money in the previous year.

Perform a similar analysis using your online bank statements. Subsequently, identify your recurring monthly bills and assess whether it is necessary to continue all of these services. Examine your past bills and online bank statements to identify expenses related to work that are no longer applicable in your retired life. Finally, categorize your expenses as either "essential" or "discretionary."

Essential Expenses

Healthcare - Even if you have Medicare coverage and an insurance plan from your previous employer, it's important to note that your supplemental premiums and out-of-pocket expenses could still increase as time goes on.

Housing - Congratulations on owning a mortgage-free home! However, it's essential to consider additional expenses like utilities, maintenance, and potentially significant home repairs. A helpful guideline is to allocate at least 1% of your home's value annually for maintenance purposes. For instance, if your home is valued at $400,000, it is advisable to budget approximately $4,000 per year to cover routine repairs, general maintenance, or potential accessibility enhancements.

Transportation - Retiring eliminates the burden of commuting costs, which is a significant advantage. However, it's important to note that your transportation expenses won't diminish completely. Most individuals don't retire solely to stay at home, so it's crucial to factor in the cost of gas or public transportation for outings and activities, along with expenses related to vehicle maintenance. If you're contemplating purchasing a new or used car, be sure to include that expenditure as well.

Food - While your lunchtime outings with colleagues may no longer be a part of your routine, it's important to acknowledge that your overall food expenses will likely stay relatively consistent. Retirement presents an excellent opportunity to explore enjoyable activities such as taking cooking lessons or hosting gatherings for friends and family. So, while the dynamics of your meals may change, it's worthwhile to maintain a similar budget for food and explore new culinary experiences during this phase of life.

Discretionary Spending

Once you have accounted for your "must-haves," you can begin budgeting for discretionary items, such as dining out, going to the movies, and those bucket-list adventures you've been dreaming of.

Travel - The way you allocate funds for travel will vary based on the nature of the trips you have in mind, whether they involve weekend getaways, extended vacations, or visits to loved ones. For shorter outings, you can incorporate a monthly expense into your budget, setting aside any unused funds for future spending. However, if you're planning for more extensive vacations, it's advisable to establish a separate vacation fund as part of your budgeting strategy. This ensures that you have dedicated resources specifically allocated for fulfilling your travel plans.

Entertainment/dining out/gifting - While you may have a solid understanding of the expenses associated with activities like going to the movies or dining out, it's important not to overlook the funds you allocate for purchasing gifts for your loved ones. In addition to these regular gift-giving expenses, it's worth considering larger gifting priorities as well.

This could involve setting aside money for future heirs to mitigate potential inheritance taxes or making regular contributions to charitable causes, provided your budget permits such allocations. By including these considerations, you can ensure that your gifting plans align with your overall financial strategy and personal values.

Stick to your Income Plan

An effective retirement income plan should be supported by an investment strategy that allows your assets to grow and assists in maintaining your income in line with inflation. However, it's important to recognize that investment returns can fluctuate, and unforeseen expenses may arise, necessitating the inclusion of flexibility within your budget.

One approach is to express your discretionary spending as a range. This enables you to allocate any unspent funds during months when your expenses are at the lower end of the range and utilize them during months when your discretionary spending may be higher. By adopting this approach, you can adapt to changing financial circumstances while ensuring a balanced and adaptable budget.

Bottom Line

Don't forget the essence of why you decided to retire – to enjoy yourself and engage in activities that were previously elusive due to work commitments! If you need help budgeting or reviewing your retirement earnings, consider consulting with a financial advisor.

Sources:

https://www.fidelity.com/viewpoints/retirement/retirement-and-budgeting

Disclosures:

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This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.