Retirement should be a time of freedom and fulfillment, where you can enjoy the rewards of your hard work without financial worry. But do you know exactly how much you can spend each month and year?
Here’s how to determine the exact number …
Step 1: Understanding Your Current Spending Habits
Start by taking a close look at your current spending. Begin with this simple question: What is your monthly take-home pay, and where does it go? To get a clear picture:
- Review your bank statements: Look at the last full month’s bank transactions to identify fixed monthly expenses like housing, utilities, and insurance.
- Check your credit cards: Add up the total amount spent on credit cards over the past 12 months, then divide by 12 to get an average monthly spend. This will include variable costs like dining out, travel, and shopping.
- Identify hidden costs: It’s easy to overlook some expenses, especially those that are irregular or automatic. So, remember to factor in easy-to-overlook expenses like subscriptions, gym memberships, or professional fees that might slip your mind.
This exercise will give you a baseline of your current spending. Remember, though, that your spending habits might change in retirement—some expenses, like commuting costs and housing, may decrease, while others, like travel and medical, might increase.
Step 2: Factor in Retirement-Specific Expenses
Retirement often brings a shift in how and where you spend your money. Consider these common changes:
- Housing: Will you downsize, relocate, or age in place? If your mortgage is paid off or will be paid off by the time you retire, don’t forget to budget for property taxes, insurance, and home maintenance. Repair costs can be significant, especially for older homes.
- Healthcare: Medical expenses typically increase as you age, but it’s safe to estimate healthcare expenses based on your age and health conditions. Factor in Medicare premiums, deductibles, and potential long-term care costs.
- Transportation: If you’re still driving, factor in gas, insurance, and maintenance; otherwise, budget for other transportation costs, like rideshares.
- Lifestyle changes: Will you travel more, spend more time exploring new restaurants, or enjoying hobbies? These activities can add up quickly, so estimate their costs realistically.
Step 3: Analyze and Adjust
Once you have a better understanding of your current expenses and have factored in retirement-specific expenses, it’s time to create a retirement budget. Remember to:
- Prioritize essential expenses: Ensure you allocate enough funds for housing, utilities, food, and healthcare.
- Be realistic: Understand that some months may be more expensive than others due to unforeseen expenses. That’s okay—what’s important is to maintain an overall balance.
- Prioritize what matters: Identify the spending categories that bring you the most joy—like travel or dining out—and make sure these are included in your retirement budget.
- Consider inflation: Factor in the rising cost of living over time.
When it comes to budgeting, it’s easy to fall into one of two traps: avoiding it altogether because it feels restrictive or obsessing over every penny to the point of stress. Budgeting isn’t about restriction; it’s about taking control. By taking a proactive approach and analyzing your expenses, you can avoid running out of money and live a life that reflects your priorities and brings you joy.
Want to dive deeper into your retirement planning? Schedule a consultation with the Boris Benic and Associates team to discuss your specific financial goals and explore tailored strategies to achieve them.