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Making a Retirement Budget

couple working on their retirement budget

Your lifestyle after retirement will likely look a lot different than it did while you were working. From golf to cruises to spoiling grandkids, your priorities and how you spend your time will change. As a result, how you spend your money will change, too. Making a retirement budget is increasingly important, and your categories should be adjusted to match your lifestyle.  

How to Start Your Retirement Budget

When you start to think about your retirement budget, experts say it’s best to start early, before you even retire.

“The best way I’ve found to plan for cash flow in retirement is to document spending while still employed,” says John R. Power, a certified financial planner in Walpole, Mass. “It is then relatively simple to [figure] out what will go away, add in what must be changed, and then add in the costs of achieving the retirement lifestyle they seek. A good cash flow plan, an emergency fund, and a cash buffer for market perturbations are not that difficult to construct.” 

Consider Stages of Retirement 

Kevin Lao, certified financial planner and founder of Imagine Financial Security, LLC, in St. Augustine, Fla., breaks down retirement into three phases: 

  • “Go-go” years, which are the first 10 years after retirement  
  • “Slow-go” years, which are the next 10 years 
  • “No-go” years, which are the final 10 years 

“The go-go phase is like the honeymoon of retirement, so expect to spend more on leisure, travel, and entertainment,” he says. “It depends on the client, but on average I see about $10,000 to $20,000 a year on top of their normal living expenses. We also have to factor in healthcare costs, which are typically somewhat low in this phase relative to the later phases.” 

During the slow-go phase, Lao says people might still be traveling and doing other things for entertainment, but just not frequently. “So, we might cut that additional spending by 30% to 50%,” he says. “Healthcare costs start to creep up a bit in this phase.” 

During the no-go phase, retirees may have stopped world travel and family is going to visit them instead. “In this phase, while discretionary spending goes down significantly, their healthcare costs go up, and even might need to pay for custodial care,” says Lao. “It’s important to begin to create a framework of that spending transition early, to see if you are on track for your spending goals.” 

Identify Post-Retirement Sources of Income  

Unlike your working years, retirement income can come from a variety of sources, which can lead to a very different financial portfolio than you are accustomed to.

“Some retirees have less income to live on than when they were working and others actually have more money to live on than before from multiple streams of income, such as pensions, Social Security, required minimum distribution (RMD) withdrawals, and savings,” says Barbara M. O’Neill, a certified financial planner based in Ocala, Fla., and author of “Flipping a Switch.”  

Understanding what your sources of post-retirement income will be can help you predict your retirement tax liability and plan accordingly.

“For those super savers who accumulated significant sums in tax-deferred plans, budget issues will include income taxes on RMDs and a possibly higher tax bracket, IRMAA taxes for Medicare, and deciding what to do with RMD withdrawals, such as spending, gifting, or continuing to save the money elsewhere,” she says. 

Figure In the Unexpected 

Once you have your budget in place, Lao cautions his clients to consider the risks that can impact your plan. For example, you may live longer than you expected and budgeted for. Inflation can affect your ability to keep up with the costs of goods while you’re spending your savings instead of contributing to it. And then there’s the risk of long-term care and how you’ll pay for it. Finally, Lao says you may retire during a bear market that impacts your investment savings or experience prolonged low returns. 

“You might get lucky and retire in [a time like the] ‘80s and ‘90s when stocks were booming,” he says. “Or, you might have [an experience like] the ‘lost decade’ where stocks were flat from 2000 to 2010. It’s important to see what the impact of long-term lower returns might be, not just what you’ve experienced recently.” 

Put a budget in place that looks at your current lifestyle and addresses the changes you’ll face as you age. Having a strong financial foundation for whatever life throws at you can provide peace of mind for the future.  

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