Budgeting for retirement isn’t the easiest thing to do, but it is incredibly important. Not knowing how much you have saved or how much you can afford to spend on certain categories can easily lead to overspending.
According to data collected from the Employee Benefit Research Institute, 28 percent of households increase their overall spending 120 percent during the first two years of retirement. By year six of retirement, 23.4 percent of households continue to do so. Splurging early on during retirement is a sure way to derail your budget. This mistake can have long-lasting consequences later on when certain important expenses, like health care, begin to increase.
To avoid overspending during retirement, follow these steps:
First consider the monthly essentials
The first costs you’ll need to consider are your essential living expenses, The Balance explained. Your house is one of these. Others include:
- Health care.
In many cases, retirees find that their housing expenses decrease during retirement. Maybe they’ve finished paying down a mortgage, or perhaps they chose to downsize to a smaller place that costs less to maintain. Either way, fewer housing expenses are often welcomed by retirees, according to The Motley Fool.
Transportation costs also tend to go down during retirement. Consider the price of your daily commute; fuel, parking and auto maintenance costs add up quickly. While you’ll likely still hang onto your car after retiring, you probably won’t be driving it twice daily anymore.
Health care is one expense that most retirees can count on increasing, especially in their later years. When planning out your budget, don’t neglect to consider how aging will affect your health.
Second, include less-frequent essentials
While many costs are calculated on a monthly basis, there are some bills that come around once or twice a year that are just as important. For example, consider auto insurance, property taxes and insurance premiums. Don’t forget to include annual spending on things like holiday and birthday gifts.
Third, consider your retirement lifestyle
Everyone has an idea of what they want their retirement to look like. Some retirees like to stay local and spend more time with family and friends. Others prefer to spend their golden years jet-setting and seeing all the sights they couldn’t when they were too busy working. Still others choose to take up a completely new hobby.
Think about what you want to do with your retirement; then, calculate the cost of it. Will your retirement hobby be learning how to sail? Factor in the cost of your boat (as well as sailing lessons, dock rental and maintenance). Would you rather spend your retirement creating a beautiful garden? This is a relatively inexpensive hobby, but it’ll cost some money nonetheless.
Finally, take unexpected costs into account
No one can predict the future – which is why you must be prepared for anything. Bankrate noted that it doesn’t take much to knock your retirement budget out of whack. Things like getting carried away with your newfound hobby or diving into vast home upgrades are two traps that many retirees succumb to.
If you have children – even if they’re full-grown and on their own – don’t leave them out. Many adult children will turn to mom and dad when times get tough. If you think you’ll be inclined to help them out financially, be prepared for your own generosity. Set some money aside for this.
Planning your retirement budget may not be a fun or exciting activity. But it certainly is an important one. Be prepared for anything your post-career years have in store by having a solid financial plan.