How to Budget and Plan Before You Retire

Retirement ought to be wonderful. A phase of life where you spend extended time doing the things you love in the company of people you enjoy. Do you plan to travel? Perhaps you want to spend time with family, grandkids and friends.

Whatever your dream, it’s important to understand that it doesn’t just happen. It requires a strategy and, for most people, some difficult decisions about budgeting and what is needed for retirement. In short, you need a plan, ideally at least 10 years before you pull the plug on your day-to-day job.

But what should that plan include? Where should the focus be? If you work with a financial planner (and you should) they’ll highlight several important topics.

Your home

When you’re raising a family, spending money on a home with plenty of space, a yard, good schools and a safe neighborhood is important. But is that still the case after your children have grown? Is your current house the right size? Will stairs be a problem as you age? Can you take care of the yard when you’re older or afford to pay someone else to do it?

These are just some of the questions about your home you’ll need to answer before retirement. Maybe it’s important to have plenty of room when grandkids visit – or maybe not. The point is you need to give serious thought to whether you want to age-in-place or move someplace else and include that decision in your retirement plan.

Your budget

Right now, you probably have a good sense of where your money goes on a monthly or even yearly basis: utility bills, groceries, housing, vacations, or other splurges from time to time. When you’re on a fixed income, it’s a different thought process. You have a limited amount coming in and you don’t want to draw it down too quickly. You need a budget – one you can stick to – that prioritizes spending for the things that are most important to you and your family.

Your income

For most people, their income stream changes dramatically when they retire. Instead of a paycheck, they receive Social Security payments and how much they’ll receive depends on their life time earnings in addition to their age at the time of retirement. Instead of an employee-sponsored healthcare plan, they may take advantage of Medicare. But what if you want to – or have to – retire before 65? How do you cover medical costs before Medicare kicks in at age 65?

If you’ve planned ahead, budgeted and saved, you can count on an income stream from a 401k, pension plan or some other source. Ideally, you have a solid understanding of what income is available and how taxes will affect it. (Hint: you may have to pay taxes on your social security and will have to pay taxes on traditional 401k and pension payouts.)

Your healthcare

Healthcare can be expensive. In fact, some retirees take a job solely to get health benefits. The need for long-term health care is a reality too. In fact, according to the U.S Dept. of Health and Human Services, a 65 year old has nearly a 70% chance of requiring long-term care. Needless to say, that can quickly drain your retirement savings. One possibility is long-term care insurance; you should reach out to your advisor to learn if that’s a good option for you.

Your time

Retirees have a lot more free time. Sounds great, right? But the reality can be a little different. “Some people get bored after just six months,” said Virginia Copley, Director of Private Banking at First Financial Bank. “Without their career or business they may feel aimless or lost.”

This is especially true for business owners. They pour their lives into their enterprises. Once that time is past, something else needs to fill the void. It’s not a financial consideration per se, but what you do with your free time is incredibly important. Maybe you have plans to give back through a favorite charity or join a philanthropy. If so, definitely include these goals in your retirement planning process.

Your retirement

Here are a few things to keep in mind as you start thinking about your retirement needs and getting prepared.

1. Overestimate your retirement costs. There will always be expenditures you didn’t foresee. A good rule of thumb is to assume you’ll spend 80 – 85% of what you spend per year today, maybe 100% in that first year or two.
2. If you plan to spend more time with friends, travel, or take on a new hobby, that is going to incur a cost. Budget accordingly.
3. Give yourself a financial cushion. It’s better to have a little extra available each month than not enough.
4. Work with an advisor annually, especially the last decade before you retire, to craft a plan. This could be your wealth planner, financial advisor, or a banker.

With a good amount of prep work, a solid plan and a commitment to the goals you set, an enjoyable retirement is within reach.