Budgeting for Retirement

Copyright: <a href='https://www.123rf.com/profile_cmcderm1'>cmcderm1 / 123RF Stock Photo</a>Many retired people have little income outside of their Social Security benefits and what they draw from their savings. If you anticipate being in that situation, it’s crucial for you to develop a plan to make sure you don’t draw down your savings too quickly. The last thing you want is to run out of money in your retirement. To that end, having a retirement budget in place can help you make smarter choices about your retirement lifestyle and help you to create an income plan sufficient to cover your expenses.

You see, creating a retirement budget isn’t any more difficult than having a household budget like what you might use now. Although, there are considerations in retirement which you might not factor in today’s budget. Budgeting is the first step to give you the opportunity to take control of your finances.

So, when creating that budget, and looking at your retirement income needs, one rule of thumb suggests you should attempt to replace 70-90% of your annual pre-retirement income through a combination of savings and Social Security benefits, to maintain a similar lifestyle in retirement.

The median household income for Massachusetts was $75,300 in 2016. Let’s assume for a moment you’re ready to retire, and that’s close to what you and your spouse or significant other pulled in for the year. If so, anywhere from $53,000 – $68,000 of annual income might be a reasonable target to cover your expenses.

Although that is a helpful guideline, the fundamental question you need to understand, and that you should seek to answer with this exercise is this: “How much am I going to spend in retirement?” Remember, when you enter the distribution phase of your financial lifecycle, both your income and your expenses will change in your retirement years, and you need to have a careful understanding of both sides of the ledger to calculate your needs appropriately.

To answer that question, sit down with a fresh sheet of paper (or, if you’re computer-savvy, pull up a new Excel spreadsheet) and create a table for the entire year, divided by month.

First, tally your fixed living expenses. Consider monthly “necessary” expenses like food, housing costs, transportation, healthcare, and utilities. Also account for periodic essentials such as property taxes, insurance premiums, vehicle registrations and so on.

Then consider “elective” expenses that are nice to have but things you can live without, or may no longer need, like your membership to the golf club, subscriptions to magazines, or other discretionary expenses. Looking at it month by month may give you a better idea of how your expenses will ebb and flow over the course of the year.

And if you’re like my father in law, Joe, he keeps on trying to convince me that golf is a “necessary” expense. He calls it his “on tour” expense.

Hmmm . . . not so sure about that.

Heck, if you ask my mother in law, Sandy, she calls Joe’s golf her “therapy” expense.

After identifying necessary and elective expenses it is time to drill down a bit further: Will your post-retirement housing costs be the same, more, or less? For many of us, housing costs go down. We downsize after the kids move out, for example. Or we’re done paying off mortgages that have hung over our heads for 15 or 30 years. If you downsize, the cost of your utilities may be less as well.

Also, consider that your healthcare costs will change in retirement – and will likely increase. You’ll be eligible for Medicare benefits once you reach age 65, but Medicare doesn’t cover everything – you’ll be on your own for vision coverage, dental care, and long-term care. Many retirees opt to pay for Medicare Supplement or “Medigap” policies. Such policies offer coverage beyond Medicare’s limits.

Taxes are another important consideration – while your income may be much lower than it was before retirement, you’re still on the hook for taxes on withdrawals from tax-deferred retirement accounts like 401(k)s and traditional IRAs, and potentially on up to 85% of your Social Security benefits, depending on your income.

After you have calculated your fixed expenses, account for the stuff you want to do when you retire. You haven’t worked your entire life, carefully setting aside money and watching it grow in your investment portfolio, only to spend your days sitting in your house waiting for the days to go by.

Do you want to travel and see the world, or indulge in a hobby that you never had time to master, like painting or sculpting? What kind of entertainment do you want to enjoy in retirement? What special events do you want to be a part of?

Remember that staying active, engaged, and entertained isn’t frivolous. Keeping your brain and your body active in retirement is more than just a lifestyle choice – in fact, it’s key to your long-term health. And as I’ve said before, what’s the point of working so hard, if you can’t enjoy it later?

Budgeting for things you can anticipate; like housing, food, vacations and health care can require some effort, but is doable. But what can you do to prepare for those unexpected items and events? What happens if a hurricane blows through and you’re beset with thousands of dollars of unexpected housing repair costs? What happens when your adult child loses their job and savings and comes to you for a loan? The reality is that something always happens to put you on your heels.

That’s why it’s a good idea to have a cash reserve on hand or an investment that you can convert to cash quickly. You can use those funds for the unknowns that can pop up when you least expect them.

When creating your post-retirement budget, be sure to consider that we are all living longer in retirement than ever before. Your lifestyle will change dramatically over the course of your retirement. Your healthcare costs will increase, your interests may vary, and your ability to engage in the same sort of activities may change. It’s important to consider all these factors as you think about your financial needs during your retirement.

Folks, budgeting for retirement is just another way you can be vigilant and stay alert because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC. A wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@old.cutterfinancialgroup.com.

Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.

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