Even after you retire, you still need to budget your income and expenses.
In fact, it can be more important than ever to create and follow a budget. When you are retired, you likely have a fixed income and you are tapping into accounts that may not replenish itself enough to replace all of the funds you spent. Because of this, so you need to do what you can to ensure that your retirement money is utilized appropriately and that it lasts for a long time.
Entering retirement means big changes in your financial life and lifestyle, no matter how much money you have put away. Because you are no longer working, your income will suddenly be coming from a different source sources, and often the nature of your expenses will change as well. Therefore, having a well thought out budget ahead of time can make a big difference in how comfortable your retirement is. If you are ready to put together a retirement budget that works for you, you should first begin by reading the following tips:
As mentioned above, once you hit retirement age and decide to fully retire from your job, your finances and lifestyle are likely very different than from when you and/or your spouse were working. Your income is now completely different, so you will need to create a plan for how much you are going to utilize of those funds, and when you are going to pull from your accounts.
When creating a budget you will also need to take into consideration any new costs or changes in what you would normally be spending money on. For example, if you are no longer commuting to work, you may need to slightly change your budget for gasoline each month, or if you are planning to care for grandchildren, you may need to alter your grocery or entertainment budget slightly.
Life is entirely unpredictable, so one of the most important things you can do when planning out your budget in retirement is to plan on having money worked into your budgets to cover any surprise expenses. This could include anything from unexpected medical bills, expensive home repairs or even surprise veterinary bills for a sick pet. When you are creating your retirement budget you must account for the unexpected so that you are much more prepared for when surprise expenses show up.
To do so, it is recommended that you set aside a certain portion of your savings entirely for large unexpected expenses. Putting aside around 10 percent of your savings is a good rule to follow, even if it is not all set aside at once. Each year before or during retirement you can reserve some money until you have a good amount available.
In addition to planning for surprise expenses, it is also smart to plan for expenses that you can anticipate. For example, depending on how old your home is, you may need to plan on setting aside a certain amount of money to pay for home repairs that must be done every so many years. Replacing your roof or furnace is almost inevitable at some point, so it is a good idea to have money set aside for expenses such as those.
When you are first getting used to your new lifestyle and income, it can be difficult to know exactly what money you will need in each specific budget. Trying to account for how much money you will spend on coffee, gasoline and personal expenses each month may not be possible until you have been retired for a few months and you can begin to see the patterns. However, after you have spent some time in retirement you will have a much better idea of how your budgets need to be created.
You will likely have a few different sources of income once you have retired. Your money may be coming from Social Security, annuities, 401(k) accounts, IRAs and more. Each of these types of income is different in a few different ways, so it is crucial that you have a plan in place for when you pull money from each account, and what expenses are going to be covered by each account.
It is recommended that your essential expenses are paid for by using money from your guaranteed sources of income such as Social Security, annuities and pensions. Your essential expenses are expenses that must be paid for first because they are very high priority. These include health care, housing, food and transportation costs because each is necessary for your health, security and comfort. Because these are priority items that must be accounted for, it is recommended that they are paid for by using the retirement income that you are guaranteed to receive each month. Social Security checks are provided more consistently, along with money from any annuities and pensions.
Discretionary spending must also be accounted for. This category includes any spending that is not a necessity but is still important to you such as travelling, gifting and any entertainment costs. Discretionary expenses usually work well to be matched with income from tax-deferred retirement savings accounts such as an IRA or 401(k). However, everyone is different and has different types of accounts, so it is important to discover what works best for you.
It is important to think about what kind of life you want to live in retirement and look at the big picture in order to determine what money you need to set aside and where you need to put it. To do so, you will need to analyze what you spent money on previously and determine whether or not you predict your expenses in retirement to decrease, increase or stay the same. Once you have a general idea of what kind of lifestyle you want to enjoy in retirement you will be better prepared in knowing how to achieve that with the money you have. Essentially, it will just take some time and alterations before you are able to create a budget that works for you during your retirement.