Creating a Retirement Budget That Works

If you’re nearing retirement, many decisions are coming your way, from where you’ll live to how you’ll fill your suddenly idle hours. One of the most critical retirement decisions involves your finances.

Without a steady paycheck, you’ll be responsible for creating an income that will sustain your lifestyle. As crucial as budgeting was during your working years, having a sensible spending plan will be even more critical as you move through retirement. Here are tips to help create and follow a retirement budget that works.

Forget the 80% spending rule.
The much-touted 80% rule is more of a guideline than a prediction. You might indeed spend 80% as much as you did when working, but you could need more or less depending on your retirement lifestyle. It’s best to develop a customized spending plan for your unique retirement goals.

Research your guaranteed sources of income.
Guaranteed income will play a key role in your retirement budget, and now is the time to map out your Social Security payments, pensions, and other steady sources of cash.

Estimate your investment income.
It’s a good idea to check out your investment income, from capital gains on your mutual funds and dividends on your stock holdings to interest on savings accounts and certificates of deposit. Use tax returns to estimate this income or go online to look at your brokerage statements.

Track your current spending.
Knowing how much you’re currently spending will give you a baseline, so grab your statements and start going through your bills.

Adjust your spending estimates based on your post-work priorities.
Now that you have a baseline, you can adjust based on your retirement lifestyle. For example, those bills for work clothes and commuting will go away, but costs for things like hobbies and travel are likely to go up.

Conduct a trial run.
It never hurts to try out retirement before you leave work. Set aside your estimated monthly income, including what you expect to get from Social Security and any future pensions, then live on those amounts for a couple of months.

Make adjustments as needed.
If your trial runs smoothly, you don’t need to do another thing. However, if not, it’s time to make some adjustments.

Pay careful attention to spending, especially early in retirement.
Spending too much in the early years could reduce your options later, so watch your budget carefully.

Conduct a new analysis every year.
It’s important to track all your sources of income, and all your investments, on an ongoing basis. That means calculating your net worth on an annual basis and reviewing your retirement budget accordingly.

Make adjustments based on the results of your analysis.
If you want to enjoy a financially secure retirement, you need to build flexibility into your plan. That means making adjustments based on your current circumstances and changing the structures of your budget as you go along.

Your retirement should include fun, relaxation, and adventure, not financial stress. To enjoy your post-work years, you’ll need to create a budget that works for you and that’s flexible enough to change with your needs but robust enough to see you through all the years of your retirement. The tips listed above can help you get started to walk away from work with confidence and never look back.