Alright, it’s budget week. This is a critical part of determining how much you’ll need in retirement income each month to keep your earning years lifestyle. Here, we are taking that big number we got from using our formula, the one we reviewed in week one and talked a lot about in November, and we see what your actual monthly income needs are.
By now, if you work with me at all, you are familiar with budgeting and its importance. We are going to start by making a list of the items you’ll need to budget for in retirement. Many of them will be the same thing in your budget during your working years but others will be new; like healthcare, or travel.
Let’s start by asking ourselves some important questions:3
- How many years remain on your mortgage?
- Do you plan to move or downsize your primary residence?
- How will your health insurance premiums change after you retire?
- Have you factored in the increased out-of-pocket medical costs that often accompany age?
- Do you have all of the insurance you need, or should you budget for additional premiums, such as long-term care insurance?
- Will you spend more on travel or hobbies once you have more time to devote to them?
Now let’s take a look at the categories for your retirement budget:
Essentials -household, transportation, living expenses, family care, and medical/health.
These are necessary retirement expenses that you may not be able to live without. According to the Bureau of Labor Statistics, the average partial monthly breakdown of some of these expenses by cost category is $1,573 for housing, $597 for transportation, $586 for health care, $541 for food, and $238 for personal insurance.3
Discretionary - entertainment, dining out, hobbies, publications, education, travel/vacations, charitable donations, gifts, professional/social dues and gym memberships.3
These are your extras. Unlike essential expenses, they’re under your control. If necessary, you can forgo or reduce them.
One-Time Expenses -You may need most of your required retirement income for average monthly expenses in retirement. But in addition to your average monthly retirement expenses, you might face one-time expenses after you retire, such as a child’s wedding, a grandchild’s college tuition, an emergency (such as a major home repair), home improvement or the passing of a loved one.3
Taxes - Also, check the type of each of your retirement funds to determine if they are taxable when used or funded with already taxed dollars.
Retirement Budget Line Items1,2
- Homeowner’s insurance.
- Home repairs.
- Medicare premiums.
- Other health care.
- Leaving a legacy.
- Taxes - Property Tax, Tax on retirement income depending on what type of account it is in. (Federal Tax, State Tax, Local Tax.)
We did some good work today, save that list and start adding the amounts you feel are appropriate based on what you are spending on these things now.
Next week we are going to talk about filling buckets!
Until next time…
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All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.