Even if you have planned and saved well, your spending is likely to change during retirement. Some expenses will disappear when you stop working, while others will crop up. So, it is important to take time near the beginning of retirement to rework your budget to suit your new income and lifestyle. Here’s how to get your finances ready for retirement:
1. Assess your finances. Any good budget begins with an understanding of your current income and expenses. You will probably have a more limited and less flexible budget once you decide to retire. There’s no more picking up a few extra hours at work to pay for gifts for the grandkids or save up for a vacation.
Start with an estimate of your retirement income so you can budget accordingly. Then compare that amount to the steady expenses you expect to incur in retirement. You may not have a mortgage or car payment in retirement, but you will still have to pay for taxes, utilities, groceries, gas and other basic living expenses. Write down your expected costs, and then look back at your recent spending to get an idea of the average bill each month.
[See: 10 Costs to Include in Your Retirement Budget.]
2. Experiment with different tracking options. Your desired retirement lifestyle may change how you need to budget. While it’s fairly easy to project how much you will need for your steady monthly expenses, you may need to keep an eye on your spending for other more flexible expenses. You might want to track your money more closely if you’re on a tighter income in retirement. In this case, you could consider using an online budgeting tool like Mint or You Need a Budget. These tools sync with your bank account to capture your income and expenditures and can help you track where your money goes.
3. Plan to have fun. If you’ve planned well for retirement, you have a budget for hobbies and entertainment. The problem comes when you find too many things to do early in retirement and spend more money than you can afford to on things to do. However, you don’t necessarily need to stay home and watch TV all day to save money. Instead, come up with a plan for having fun in retirement. Whether you want to travel frequently or learn to paint, you can fit these expenses into your budget. You just need to plan for them ahead of time and look for affordable ways to accomplish your goals.
4. Have conversations with your adult kids. Some baby boomer retirees help their adult children with their basic expenses. While it’s difficult to watch your children struggle financially, you don’t want to put your own budget in peril. It’s best to have conversations with your kids up front about what you can and cannot afford. Set clear expectations about the help you are able and willing to provide, and don’t jeopardize your own retirement budget.
5. Get a handle on health care expenses. Health care is likely to be one of your biggest expenses during retirement, especially if you retire before you’re eligible for Medicare coverage. Before retirement, get a handle on what you’re likely to pay for health care, and be sure to set money aside for those costs. Even if you’re relatively healthy now, nearly everyone experiences health difficulties at some point during the aging process. So write health care expenses into your retirement budget, even if you don’t currently have any.
[Read: How to Apply for Medicare Without Claiming Social Security.]
6. Plan for other big ticket items. Big ticket items, especially unexpected expenses, can wreck anyone’s budget. But emergency expenses can be especially damaging if you’re on a tight budget during retirement. So plan for potential problems like replacing your aging furnace and repairing your car as well as fun goals, such as going on a great vacation. The best way to budget for big ticket items like these is to set aside a bit of money every month so that when the expense pops up you have the money to pay for it.
7. Avoid debt. The best thing you can do to keep your expenses under control during retirement is to stay out of debt. If you’re not already debt-free, remember to include the debt payments in your retirement budget. And once you are debt-free, take care to avoid debts throughout your retirement years. One way to do this is to plan for future expenses so you won’t need to take out a loan. For instance, try to pay off your vehicle before entering retirement. Then, set aside money each month so you can replace your vehicle when it begins to need expensive repairs. That way, you don’t have to take out a car loan.
[See: 10 Costs You Can Eliminate in Retirement.]
Budgeting during retirement isn’t that different from budgeting while you’re working, except that you need to be even more careful about your spending. Many retirees have a fixed amount they are able to spend each month, and creating a budget can help you to live well on that amount.