A recent survey found that 45% of individuals around the age of retirement worry about outliving their savings. More than one in three (39%) have seen their standard of living decline post-retirement, and about 30% admit they have already spent more than they should in retirement. It is easy to underestimate how much you will need in your golden years, and unexpected expenses can drain your savings faster than expected. This is why planning ahead is so important. One of the best ways to stay financially secure in retirement is to create a budget. A well-structured retirement budget helps keep your spending in check and ensures your savings last.
A financial advisor can help you understand the importance of budgeting for retirement. This article also explores why budgeting remains essential in your golden years and provides practical tips on how to create a budget for retirement.
Below are 4 reasons to keep budgeting in retirement:
1. It ensures you do not outlive your savings
One of the biggest financial concerns in retirement is running out of money too soon. Without a budget, you could easily lose track of your spending and withdraw too much from your savings pool. Unlike your working years, where you more or less have a fixed monthly income that provides structure, retirement requires you to carefully plan ahead to ensure your savings will last..
A retirement budget helps you determine how much you need to draw each month to cover your expenses while preserving your nest egg for the long haul. Without a budget, your spending may become unpredictable and lead to a situation where your savings deplete faster than expected. Many retirees underestimate how quickly their withdrawals can add up, especially when factoring in medical costs, inflation, and unplanned expenses. Running out of money in later years can create serious financial challenges. It may leave you financially dependent on your children or grandchildren or force you to make drastic lifestyle changes. Some retirees may also find themselves needing to downsize, cut back on essentials, or even return to work, which can be stressful.
Having a budget provides structure and allows you to track your spending, make informed financial decisions, and adjust your withdrawals when necessary. It allows you to enjoy your retirement while ensuring you have enough money at your disposal to maintain your desired lifestyle.
2. It offers peace of mind
A well-planned monthly budget in retirement removes financial uncertainty from the equation and helps you feel more in control of your funds. Instead of constantly second-guessing your withdrawal rate or worrying about whether you are spending too much, a budget provides clarity. It serves as a roadmap and shows you what you need to do to cover your needs, where your money should go, and how to ensure it lasts throughout retirement.
Without a budget, you may overspend in the early years of retirement, only to realize later that there is not enough money left in your accounts to cover essential expenses. A budget lays everything out in black and white, making it clear how much you can comfortably withdraw each month without depleting your savings too quickly. Since a budget is built on careful calculations, it helps prevent financial slip-ups. It ensures that you are not withdrawing too much too soon or spending on things that could put your long-term financial security at risk. A structured plan keeps spending in check, allowing you to live comfortably without the fear of financial instability in later years. Moreover, when you have a structured plan in place, you are more likely to stick to what is best for you. This discipline creates a sense of security, improves your overall well-being, and allows you to focus on enjoying your retirement.
3. It helps account for multiple financial needs
Without a budget for retirement, managing multiple expenses can become overwhelming. You can have multiple types of expenses in your golden years. There are recurring expenses, like groceries, utility bills, gas, insurance premiums, and prescription medications. These are non-negotiable and require a constant outflow of cash every month. Then, there are essential but unpredictable expenses, such as medical treatments, home repairs, etc., that can arise due to illnesses or accidents. Retirement also brings non-essential yet non-negotiable expenses, like travel, dining out, socializing, etc. While not essential, they can immensely contribute to a fulfilling life. A budget allows you to incorporate all of these expenses to ensure you can enjoy life without jeopardizing your savings.
Having a structured budget helps you balance these financial needs simultaneously. Instead of making spending decisions on the fly, it’s more beneficial to categorize your expenses and allocate funds accordingly. This ensures that your essentials are covered first while still leaving room for leisure activities. A budget also allows you to prioritize when necessary. For example, in case of an unplanned expense, you can adjust your spending in other areas without disrupting your entire financial plan. Budgeting also prevents overspending in one category. Without a plan, you may spend more on discretionary activities and then struggle to cover necessary bills. Assigning separate budgets for each category keeps your spending organized and ensures financial stability.
4. It helps you stay prepared for emergencies
Budgeting for retirement is essential when it comes to handling unexpected emergencies. Consider the example of the recent wildfires in Los Angeles. Many homeowners suffered severe property damage and financial setbacks. Unexpected situations like these can derail your financial security if you do not have a dedicated emergency fund. A well-structured retirement budget helps you stay prepared for such unexpected events in two crucial ways.
First, it ensures that you maintain a separate emergency fund at all times. Instead of stressing out and scrambling for money when an emergency strikes, you will have a financial cushion readily accessible to rely on. Knowing that you have a dedicated fund gives you peace of mind and allows you to focus on the situation at hand. Second, a budget prevents you from dipping into funds meant for essential living expenses. Without a financial plan, you may end up withdrawing from your savings or reducing your retirement income meant for day-to-day needs. This can create long-term financial instability. Having an emergency fund built into your budget ensures that your regular expenses, like groceries, utilities, and healthcare, remain unaffected even when an unexpected cost arises.
A budget also helps you replenish your emergency fund after using it. When an emergency expense depletes your savings, you need a strategy to rebuild it. Budgeting allows you to adjust spending in other areas, cut back on discretionary expenses, and use your funds toward rebuilding your safety net. This way, you remain financially secure and prepared for any future emergencies.
How to create a budget for retirement?
1. Make a list of your essential expenses
The first step in creating a retirement budget is understanding your specific financial needs. Some expenses are common to all retirees. These include taxes, groceries, utility bills, healthcare costs, insurance premiums, etc. Since these are necessities, they should be at the top of your budget plan. However, retirement expenses are not the same for everyone. Your financial situation may also include additional costs that others do not have. For example, if you have outstanding debt in retirement, such as a mortgage or credit card bill, you will need to allocate funds for these dues. Some retirees also continue supporting their children or grandchildren financially. If this is the case with you, you should factor this into the budget. Your health plays a big role in determining your expenses as well. Your monthly expenditure may be higher if you have a lifestyle disease that requires regular medical treatments, prescription drugs, etc. You need to estimate these costs as accurately as possible and account for them in your budget. You must also consider your lifestyle goals. For example, if you plan to travel or socialize a lot in retirement, you must include these in your budget.
Once you have identified all your essential and lifestyle expenses, you can organize them into a structured budget. This allows you to plan ahead and be financially prepared for all these expenses throughout retirement.
2. Use the 4% rule
When creating your retirement budget, it is important to determine how much you can withdraw from your savings each year. The 4% rule can be a helpful method to do this. The rule suggests that you use only 4% of your savings in the first year of retirement and then change the amount according to inflation in the following years. The 4% rule can potentially help your money last for at least 30 years if used consistently. For example, if you have a nest egg of $2.5 million and you apply the 4% rule, you could safely withdraw $100,000 per year. Breaking this down further, you get $8,333 per month to cover all your expenses.
Once you know the amount of money you have at your disposal for your monthly budget in retirement, you can assign portions of your withdrawal to different expense categories. For instance, you can allocate 50% to your essentials, such as healthcare costs like insurance premiums, groceries, utilities, and taxes. 30% can be put towards lifestyle expenses such as travel, dining out, etc. The remaining 20% can be allocated to unexpected costs like home repairs, medical emergencies, or helping family members if needed.
Working within this fixed amount can ensure that your withdrawals are sustainable, and you preserve your savings for as long as you live. However, you must know that the 4% rule is not foolproof. It may or may not suit your exact retirement needs, but it can be used as a starting point for managing your finances during retirement.
3. Account for different phases of retirement
It is important to understand the different phases of retirement and create a budget that evolves alongside your lifestyle during each of these phases. The first year of retirement is often a period of adjustment. You may travel more, engage in more social activities, and have more discretionary spending. However, this is also when you make a lot of financial mistakes. It is crucial to have a clear but flexible budget during this phase that allows you to enjoy your new lifestyle while ensuring you do not finish your savings too quickly.
Between years 2 and 15, you are likely to settle into a more predictable financial routine. So, your budget can focus on a more balanced spending approach that prioritizes your essential and non-essential needs. During this time, you should also account for Required Minimum Distributions (RMDs) from tax-deferred retirement accounts and understand how the tax liabilities affect your budgeting. After 15 years in retirement, your spending habits may shift once again. Social and travel expenses may decline as you age, but healthcare costs are likely to increase. Medical expenses, long-term care, etc., can be your prime expenses during this phase. Your budget must reflect these to help you maintain financial security.
It is important to review your budget regularly in each of these phases to ensure your finances and lifestyle align with each other.
4. Consult with a financial advisor
While general retirement budgeting strategies like the 4% withdrawal rule or the 50-30-20 approach can provide a good starting point, they may not be the best fit for everyone. A financial advisor can tailor your retirement budget to fit your needs, ensuring it aligns with your financial goals and lifestyle. For example, the 4% rule may suit some retirees. However, others may need to withdraw more to cover their medical expenses or travel costs. A financial advisor can help you create a withdrawal strategy that adapts to your needs without burning through your savings too fast.
To conclude
You should continue to budget in retirement. However, your retirement budget should not be a continuation of your pre-retirement spending habits. Instead, it should be tailored to your new lifestyle and financial priorities. It is essential to account for changes in your health, lifestyle, income, and more. You must also understand that adjusting to a new budget may take time, which is why it is important to be realistic and create a flexible plan that aligns with your present and long-term needs. Consulting a financial advisor can help you make a retirement budget that can cover all your financial goals and, at the same time, is easy to follow.
Use the free advisor match tool to get matched with experienced financial advisors who can guide you on how to budget for retirement effectively. Answer some simple questions about your financial needs and get matched with 2 to 3 advisors who can best fulfill your financial requirements.
For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at [email protected].
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.
