3 Key Tips on How to Properly Budget in Retirement
Budget. When we hear that term, for many it automatically stirs negative thoughts. Restrictions, rules, boundaries you don’t want to be confined by. Even the thought of budgeting is a reminder of what you don’t have and things you may not be able to do.
Realities of life would be another term if you don’t like the word budget. One way or another you are going to have to deal with a budget.
All those years you toiled, working, setting down roots somewhere, maybe starting a family…basically doing life.
Setting a standard of living you were comfortable with.
Playing by the rules, hopefully saving some in order to maintain that standard of living even after you retire and for the balance of your time here on earth.
Nothing odd about any of that. That’s the way many people live out their lives. Doing so requires some diligence and engaging in some activities we may not necessarily enjoy. One such activity you didn’t like so much back in the day, before retiring, might have been budgeting. You’ll find lots of people in that same boat.
Well, now that you are retired, regardless of what you managed to save (or not) over all those years, you have to step back and do some more budgeting, like it or not.
In the past it was all theoretical. Now, it’s reality. You are going to have to live within your means or you might well end up without the means to maintain the standard of living you’ve grown used to and want to maintain.
Time to look at budgeting after you’ve retired, with a goal of having and maintaining the retirement you envisioned.
Let’s start big picture
Before jumping into the monthly picture, it might make sense to look at the big picture, gaining some perspective over what you could be looking at over the long haul.
Let’s say you add up everything and come to conclude that your monthly bills amount to approximately $3,800. That’s $45,600 annually.
If you’re currently 65 and live 20 years, that would be $912,000 to have enough money to maintain your current standard of living, as long as you are covering your bills now.
Bunch of assumptions with that, such as not having a catastrophic injury or illness, unforeseen spending that you didn’t budget for, etc. Also, you need to consider the likelihood that you’ll probably “slow down” some over time, so perhaps some expenses will actually diminish somewhat, which could save you money.
What if instead you live 35 years, till you’re 100? Your total costs (same assumptions and caveats as above) would be $1,596,000. Wow…that’s a lot of chedda.
Before you fall over backwards, keep in mind a couple things.
First, unless you have great genes and everyone in your family tends to live into triple-digit figures, statistically you won’t live that long if you’re currently 65 – for most that means not even close.
According to the Centers For Disease Control and Prevention (CDC), the average life expectancy nowadays for both sexes is 76.4 years.
Hmmm. The upside is you would be looking at far less in expenses than if you live to 100. The downside is you are looking at a much shorter lifespan if currently 65.
The catch here is that you can’t know how long you will live, so when budgeting you need to plan for the longer-end versus the shorter-end of the equation.
Either way, we have the big numbers out of the way in terms of what might be needed.
From here, it’s monthly expenses. Many look at their income first to determine what they have to spend when considering their budget. Given you are in retirement already, it makes more sense to look first at your costs.
Doing so first can help you determine what’s needed to cover those monthly expenses in the form of income. If that income doesn’t do so you might have to rethink plans and potentially look at alternative income sources to help you balance your budget.
First things first. Now that we have some perspective, let’s take a look at what those monthly expenses are comprised of so that we know we have covered everything and don’t get surprised.
Let’ start with your fixed expenses. These are the bills you pay the same amount for each month, which probably includes housing, utilities, medical (drugs and supplies, health and insurance premiums and deductibles), personal debt, insurance, property taxes, transportation, monthly entertainment services (Netflix, Prime, gym, country club and other memberships), and more.
Then there are the variable costs. Many people think of these as discretionary, such as travel, golf or other sports, hobbies, hitting the movies, and more.
That would be wrong. In fact, it includes most costs you incur each month that vary in price. Here’s a non-exhaustive list:
- Food (groceries or eating out) – According to the BLS the average household will spend roughly 11-percent of the budget each month on food, with roughly 7-percent spent on groceries and 4-percent spent on restaurants and other food items prepared by someone else
- Transportation – Gas and vehicle maintenance/repairs, as well as other transportation (e.g., public transportation), tolls and parking fees, and more
- Out of pocket health – Trips to dentist and other non-covered providers you pay for out-of-pocket
- Healthcare – Non-prescription drugs and irregular prescriptions, out-of-network visits and doctors not covered under you insurance, etc.
- Entertainment – Movies, theme parks, ball games, outdoor activities and hobbies, and much more. The BLS estimates that the average household spends roughly 5-percent of their monthly budget on entertainment.
- Assorted – Clothing, other personal care (ex. beauty products/services), home repairs, and many more
An important point to consider is the fact some of your current budget items will likely decrease or be eliminated as you get older, such as commuting costs, the home mortgage and car payments (assuming you pay them off), etc.
But some things will cost more, so you have to balance everything. And keep in mind this doesn’t include long-term care, which can be very costly, especially the longer you wait to purchase a plan.
All told, when you add all of those things up, you should have accounted for everything you are spending on a monthly basis, even the miscellaneous.
In our previously detailed scenario, you determine that all of that equates to $3,800 monthly. On an annual basis you are looking at $45,600, and $912,000 over 20 years.
One last note on your expenses and spending. None of this considers real-world realities of paying taxes, inflation, gifting to family members, a trip around the world you didn’t include in your monthly expenses, legacy and estate funding beyond what you’ve already set aside (maybe you want to continue to contribute to that amount), and more.
Everything that goes out the door in some manner, including those that are one-off items, unaccounted-for budget items, what goes to Uncle Sam, etc., must be accounted for.
Now we can figure out how you are paying for this and will continue to do so for the rest of your life.
What ya got now
The payroll checks have stopped.
You’ve entered retirement…with at least some change in your pocket…and hopefully more.
Begs the question, “What kinda income can you count on going forward?”
This would include the savings you have from all sources, as well as any other types of income you’ll be able to draw from each month to cover your monthly bills.
Income sources will include the following:
- Retirement savings
- Pension income, if any
- Social Security
- Investment income, if any
- Part-time employment, owning your own business, passive income, etc.
This is what you’ve saved in your qualified retirement savings accounts, such as IRAs and 401(k)s, pensions and annuities, etc., as well as personal investment or cash accounts where you already paid taxes. Obviously the more you have the better!
If you happen to have $900k saved, you would be in pretty good shape, able to cover most of your expenses (you still have to account for taxes and inflation), assuming you’re 65 and live another 20 years. Again, this would be well past the average life expectancy of 76 years.
Were it that easy…
If that savings figure is less, then you’ll have to have income from other sources. Or look at ways to cut your expenses. Or do both.
For example, if you have $200k in savings, over 20 years that would equate to a gross amount (again, have to account for taxes and inflation) of $10k annually or $833 each month you could withdraw. In straightforward terms your budgetary shortfall would be just under $3,000 each month. And some portion of the distributions taken would be taxed, so the shortfall would probably be more.
If instead you’d been able to save $400k, you’d have $20k annually or $1,666 monthly over twenty years, before taxes and inflation are accounted for. In this scenario, you’d have a budgetary shortfall of around $2,135 each month. Again though, that amount would be decreased due to taxes on distributions.
Let’s turn it around and view it another way. Let’s assume you have $200k and would be withdrawing $3,800 monthly. The $200k would continue to grow some (let’s say earning 6-percent annually) even as you take monthly withdrawals.
How long would that money last? Approximately five years with systematic withdrawals totaling $224,290.
If instead you had $400k (same facts), your money would last approximately 11 years with systematic withdrawals totaling approximately $516,000.
Fortunately, there are other income sources to consider.
You earned a guaranteed check from the government due to paying into the system over all those working years. This is based on the what you paid into the system, averaged over your highest earned wages over 35 years. The average social security benefit for the typical individual in 2023 is $1,782 per month, according to the Social Security Administration.
There’s a caveat – the earlier you start taking it, the amount is decreased. If you started when eligible at age 62, you’d be looking at a discounted amount (approx. 30-percent discount), or $1,247 monthly. And that’s for your lifetime. (Note – you can draw benefits while still working)
If instead you hold off and wait till you’re 67 to start receiving the full-benefit amount (this is considered the full retirement age for those born in 1970 or later), you’d be looking at a monthly amount of $1,782. And if you were able to wait until age 70, that amount would actually increase to $2,210 monthly for life.
Assuming you did hold off for a couple years after retiring at age 65 and started taking your social security monthly benefit at age 67, that $1,782 would cover approximately 47-percent of your monthly expenses of $3,800.
If combined with the retirement savings from above ($200k/$833 monthly or $400k/$1,666 monthly, respectively), your combined income (retirement savings and social security) would be approximately $2,615 to $3,448, respectively.
While reduced, you would still have a budgetary shortfall of approximately $350 on the low end to as much as $1,185 on the high end.
As you can see, you’d definitely be getting close to covering your monthly bills, and maintaining your standard of living.
Even though you are retired it doesn’t mean you can’t continue to invest and bring in income from doing so. In fact, you can continue to earn interest on your current retirement and cash accounts as previously detailed.
So, if instead of paying the full $3,800 out of your retirement savings each month, given your social security would cover approximately 47-percent, you instead pulled just $2,000 monthly from your $200k in retirement savings.
The $200k savings would last 11 years with systematic withdrawals totaling $224,290. That’s more than doubling the years that your savings would last.
If instead you had $400k in savings, in the same scenario (pulling $2,000 monthly from savings), your retirement savings would last more than 30 years.
Additional areas to consider would be what you are invested in or might do so going forward. For instance, investing in an annuity with guaranteed lifetime income. This would provide you some amount of income that’s guaranteed for the rest of your life, and potentially for your spouse going forward beyond that.
Another potential source would be passive income, such as investment with real estate investment sponsors. If you have a second home already there is also the potential for rental income that would flow from that.
You’re retired – who wants to work some more?
We get that. But if you have a budget shortfall, such as what we spoke to in the aforementioned scenario, then it is a matter of cutting your expenses, which means you’re spending less, or coming up with more income to make your budget balance.
Depending on how long you’ve been away and what the situation was when you left, you might be able to walk back into the job you retired from. Maybe even at the old salary. Don’t assume you can’t go back in some capacity.
Maybe you consider starting a biz and offering your services and expertise to any number of companies in that industry or the sector you retired from, including your old employer. In this scenario you get to determine how much you charge, the number of hours you’ll do so, and your terms.
Say you’ve had enough and want to do something completely different, then look to hobbies or areas of interest you might have. Whether full or part-time, this type of scenario won’t feel so much like work and might provide enjoyment beyond the money you earn.
Whatever you do, even if the income you bring in is modest, every little bit helps. Keep in mind that if you were to work for two to three more years, that is time you can hold off on tapping into your savings, allowing them to grow more.
And ultimately that’s less years of retirement you’ll have to pay for. That can create some serious peace of mind now and over the long run.
So you probably get the picture. Yeah, you are going to have to engage in some budgeting now that you are in retirement. Everything before entering this period of your life really doesn’t matter now from a financial standpoint.
Now it’s all about what you have in terms of income to cover what you are spending. If there is an imbalance your financial future might be imperiled during the very years you probably hoped to live out a peaceful existence.
The good news is that the mere exercise of budgeting at this point can give you some perspective and even spur ideas that will help you find a happy medium between what you want to do and what you have to make it happen.
Here at Oak Harvest we can assist you with this. We have tools that can help you as you assess your budget and overall finances. We can also look at your current retirement plan and provide guidance.
And if you don’t have one, we can assist by building a holistic, comprehensive retirement plan addressing relevant issues, utilizing strategies that cover taxes, income, spending, healthcare, legacy, and more, customized to your family’s specific scenario.
A plan created with the goal of ensuring you have the best opportunity of living out the retirement you and your family envision.
Let Us Help You Achieve the Retirement You Deserve!
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