For those who are still in the thick of their working years, creating a post-retirement budget can seem like peering into a fuzzy crystal ball that contains too much uncertainty to even worry about at this point. But your budget during retirement may not be as complicated as you think it will be, and as long as you apply common sense and make some reasonable assumptions, you can probably come up with at least a viable initial estimate of your income and expenses after you stop working. Use these simple steps to make your first estimate of your future cash flow:
Obviously, the earnings from your current job will cease after you retire, to be replaced by (hopefully) several different sources of retirement income. These can include Social Security or a railroad or military pension; income from IRAs and/or employer-sponsored retirement plans such as 401(k) or 403(b) plans, income from taxable investments such as interest and dividends or the sale of stock or other securities, annuity income and earnings from a job that you work after you retire from your primary career. If you have no idea what your income from these sources will be, then it’s time to make some reasonable estimates about how much your retirement plans will grow before and during your retirement and also get an estimate of your Social Security benefits from the Social Security Administration. See if your HR department can give you an estimate of your retirement benefits as well if necessary. When you have added up all of your future estimated sources of income, then your projected budget is half finished.
Your expenses will likely change at least as much as your income when you retire. Instead of saving for retirement and your kids’ college educations, you may be facing long-term care insurance premiums, increased health care expenses and a higher cost of living. But other expenses may decrease or disappear. Your car insurance premiums may drop and you will be eligible for senior citizen discounts, and the day may finally come when you make the last mortgage payment to your lender. But many financial experts warn that your living expenses during retirement may be just as much as they are now, so you may want to project your expenses out the number of years until your retirement and factor in a realistic rate of inflation, so that you have a sensible projection of your future living expenses. And, of course, don’t forget to include the cost of all those fun things that you want to do after you stop working, such as traveling, hobbies and other activities. Other factors such as taxes and longevity can also play substantial roles in determining the quality of your retirement. Consumer Reports suggests a simple way to create a retirement budget. And there are many more. Try one out to see what works for you and your style of money management.
Of course, this is just a brief summary of the issues that must be considered when budgeting for retirement. For more information on retirement budgets, visit the links above or consult your financial advisor.