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How to set a realistic retirement budget

July 14, 2017
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Want to start saving for retirement? The best place to start is to examine your current spending habits. Looking at income alone is misleading. Your expenses and lifestyle are really going to determine what you need to tuck away to enjoy a stress-free retirement to the fullest.


To get started, you need to gather some financial information from the past year. Looking at a full year’s worth of spending will give you a more accurate picture of expenditures, as you likely have annual bills and seasonal purchasing fluctuations. Here’s what you’ll need: bank account and credit card statements, a few paystubs, and your most recent tax returns. A little patience and time won’t hurt either.


Here’s how you’re going to categorize your expenses:


  • The need-based essentials: housing (mortgage/rent, maintenance, and utilities), food (grocery and eating out), transportation (gas and car payments), healthcare (co-payments, other expenses not covered by insurance, personal hygiene).  
  • Regular non-essential bills: this category includes any product or service that is not required for survival but for which you receive a monthly bill. Think gym memberships, cable and internet, and subscriptions for newspapers or Netflix (no, Netflix is not an essential).
  • Required non-monthly bills: these include annual or quarterly payments such as property taxes, car registration, and insurance premiums (healthcare, auto, home, life, etc…).
  • The extras: this is what you do for fun, such as traveling, hobbies, sports, and entertainment.


Organize these bills into a spreadsheet that also breaks down the cost of annual or quarterly bills as monthly expenses.  


Quick note: Don’t lump credit card payments into one category. Instead, breaking down the expenses you put on these cards will be a better indicator of your spending patterns.


Now that you’ve uncovered your current spending habits, it’s time to factor in retirement costs. When planning for retirement, many people make the mistake of focusing solely on how their current financial situation will impact their future. Most do not consider how their needs will change as they age.


Believe it or not, most of your expenses will decrease as you get older. For example, older homeowners will probably have paid their mortgage off by the time they retire; if not, the home equity will be high enough that they can downsize without taking on a new house payment.


The one expense, however, that will increase in retirement is healthcare- most retirees and soon-to-be retirees fail to account for this shift. When calculating healthcare costs, you need to consider:


  • How the shift from employer-sponsored policies to personally paid premiums will affect your budget.
  • If you want to retire before the age of 65, you’ll be unable to supplement your healthcare costs with Medicare.
  • How your health will change over time (the effects of aging and the likelihood of developing a chronic condition).


Start exploring the health insurance market for premium estimates to include in your current budget.


Finally, list your retirement goals and how you envision spending your time. Do you want to travel more? Will your loved ones be taken care of when you’re gone? Do you want to pursue philanthropic endeavors? Then quantify these desires and add them to your current budget.


By the end of this process, you should have a budget that gives you some idea of what your retirement costs will be if you maintained your current spending habits.


Want to see if you’re on the right financial path and how much you’ll need to save to meet your goals? Use our free Saving for Retirement calculator. And if you’d like to secure your financial future, contact Retirement Income Specialists today! We’ll help you maximize your current savings and create a long-term economic plan for a worry-free retirement.