Budgeting doesn’t end when you enter into retirement. The length of retirement is unknown and it’s critical that retirees do not run out of money in their later years.
Determine Monthly Expenses
One of the first steps to budgeting as a retiree is having a clear idea of your monthly expenses.
Once you know what your monthly expenses are, Andres Garcia-Amaya, CFA and CEO of Zoe, recommends breaking them down into essential and discretionary expenses. Essential expenses are the ones you need to have and nice to have expenses are categorized as discretionary.
Then, create an expense sheet that outlines all essential and discretionary expenses. “It is very common that what people think they are spending is not actually what they are spending,” said Garcia-Amaya.
Create a Spending Plan
Joe Buhrmann — CFP, CLU, ChFC and senior financial planning consultant at Fidelity’s eMoney Advisor — said most workers, retired or not, tend to commonly spend the most money on Saturday. This is the day of the week often spent running errands, grocery shopping, stopping by home improvement stores or enjoying meals out with friends.
During retirement, Buhrmann said every day is Saturday when you are no longer earning a paycheck. Retirees have a few inflows of funds, like Social Security and pension checks, and oftentimes only outflows and expenses.
After you understand what your monthly expenses are, it’s time to create a spending plan for retirement. Use this plan to track current expenditures and review expenses line-by-line. Determine which expenses will carry over into retirement and which will increase (like travel) or decrease (like work-related expenses). Buhrmann also recommends that retirees ask themselves what they are retiring to and consider their desired lifestyle — including travel, time with family and friends and hobbies — to determine initial retirement expenditures.
After creating a spending plan, use the next few months to see if your actual spending matches that outline. If there’s a big difference, reflect and update your expense sheet.
Review Your Emergency Fund
An emergency fund matters now more than ever for retirees. Eric Phillips, CFA and senior director at Human Interest, said with the current uncertainty of the markets it is even more important to have an emergency fund in retirement in the event something outside of your normal expenditures comes up.
Remember that retirement is similar to your working years in the sense that you have a certain amount of income you are capable of taking. While this isn’t too different from a monthly income from your profession, the difficulty for retirees is that they are no longer replenishing savings and must rely upon investments to replenish these funds.
“Your emergency fund not only helps in a pinch when something unexpected happens, it is a huge relief mentally to know you have a backstop calculated in your savings,” said Phillips.
One space where you can establish an emergency fund is in a tax-free account like a Roth IRA. Buhrmann said this account should be in place for five years and the saver should be age 59½.
Plan For Safe Withdrawals
Transitioning into retirement means for the first time in years retirees won’t have a salary.
While the majority of your expenses will be covered by Social Security, pensions, other income sources and withdrawals, Garcia-Amaya recommends planning for how you will pay for any remaining expenses. This plan should cover how you will take withdrawals from your savings and that the amount you need to withdraw is sustainable.
Consider Diversifying Retirement Savings
Retirees don’t need to keep their retirement savings exclusively in traditional IRAs and 401(k) plans. Buhrmann recommends looking into the benefits of diversifying retirement savings from an income-tax perspective.
Think about contributing to tax-free accounts, like a Roth IRA, Roth 401(k) and health savings account (HSA), along with putting savings in taxable accounts like a retail investment or brokerage account.
“These may allow you to blend distributions to help minimize the bite that income taxes can take out of your retirement distributions,” said Buhrmann.
Get Organized by Using an Online Portal
If you have previously tracked all of your assets, liabilities, income and spending in a three-ring binder or using a shoebox of records, Buhrmann recommends using an online portal and aggregator to sharpen your financial organization in retirement.
“Many of these tools offer automatic tracking of expenses and even organization by category,” said Buhrmann. “These can provide optics into your current spending habits and help you determine if they align with your intentions and priorities.”
Talk to your financial advisor or a financial professional about the best online portal for your financial circumstances and learn how you can sync up. Some of these portals may offer online vault capabilities where critical documents and password information for your online accounts may be stored securely.
Beyond being a helpful organizational tool, these portals can be invaluable in the event of a major health event or death. “Just be sure that a spouse, trusted family member or financial professional can access these documents in the event of an emergency,” said Buhrmann.
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