If you’ve recently retired, you may be ready to sit back and relax but there’s one very important thing you must do first. Now that you no longer have a regular paycheck coming in from your former job, it’s time to take another look at your budget. If you’re not sure where to start, here are some helpful tips to get you on the right track.
Tally up your essential expenses first
The first step in creating your retirement budget is knowing how much money you’re spending each month. Make a list of all your expenses that you have to pay each month to maintain a minimum standard of living and add up the total. That includes things like housing, utilities, transportation, food, insurance, taxes, charitable donations, savings, investments and any debt payments you’re making.
You might be looking at that list and wondering why saving is included here. While the money you invest or save each month isn’t technically a bill, it’s important that you continue making it a priority even after you’ve retired. By continuing to grow your nest egg, you reduce the risk of coming up short in your later years.
Add in discretionary spending
Once you’ve figured out what your baseline expenses are each month, the next step is determining what you’re spending on extras. This is where you’d include things like entertainment, clothing, dining out, personal or household items, money spent on vacations, travel and gifts.
If you’re not sure what you’re spending in these categories each month, using a free budgeting app like Mint can paint a clearer picture for you. This app allows you to sync up your checking, savings, credit card and investment accounts right from your smartphone. It tracks your debit and credit card purchases and you can manually enter cash transactions so you always know where every penny is going.
Compare spending to income
After you’ve added together all of your expenses the next step is to compare it to your income. This includes taxable and nontaxable distributions from a qualified retirement plan, such as a 401(k) or IRA, money you withdraw from a Health Savings Account to cover medical expenses, annuity payments from a pension, distributions of dividends from a taxable investment account or income generated by any real estate investments you own.
You’d also need to factor in Social Security if you’re opting to take it as soon as you retire. Generally, you can receive reduced benefits starting at age 62 but if you hold off until age 70, you’ll receive an 8% bonus for each year you delay benefits after reaching full retirement age. Currently, full retirement age is 66 or 67, depending on when you were born.
Make cuts if needed
Ideally, the amount of money you’re bringing in each month exceeds what you’re spending but if that’s not the case, it’s time to start trimming the fat. If you only have a very small shortfall, that may be as simple as cutting back on how often you eat out or reducing your cable and cellphone plans to shave a few bucks off your spending.
More drastic measures may be needed if you’re going into the red by hundreds of dollars each month and relying on credit cards to fill the gap. For instance, if you’re spending a lot on housing you could consider selling your home and renting something less expensive. Consolidating your debt at a lower interest rate so you can pay it off faster is another smart move if you want to free up cash in your budget.
The bottom line
Building your retirement budget isn’t rocket science. The most important thing to remember is that your needs take precedence over your wants. As you’re crunching the numbers, be aware of how the retirement lifestyle you want matches up with the one you can afford.
