Question 2. How can I create a retirement budget?
Most people aren’t exactly sure what they will want to spend in retirement. It is a new stage of life that often entails different routines and spending habits. A retirement budget can help you track your income and expenses, set financial goals, and make sure you are on track to remain retired.
Here are 3 steps to creating your retirement budget:
1. Understand your income streams:
Often there are several different ways to create income during retirement. There is Social Security, retirement accounts such as a 401(k) or IRA, pensions, real estate, part-time earnings, and more.
2. Plan your distributions carefully:
For many people, a 401(k) or IRA will be one of their biggest sources of income in retirement. When you reach retirement you’ll need to begin taking distributions from these accounts. Planning when, how and from which accounts you’ll take the distributions is crucial to planning your retirement budget well. We want to make sure we are optimizing taxes while ensuring we do not pull out too much from retirement accounts to restrict the growth of what you have invested.
3. Track your expenses:
A vital part of a retirement budget is managing your expenses. It can be tempting with the increase in free time to spend more money than in the past. If you do not have a good idea of what you spend each month, start by reviewing your bank and credit card statements to track where your money goes each month. It can be helpful to divide your expenses into different categories: essential expenses (groceries, utilities, transportation), nonessential expenses (travel, hobbies, subscriptions), and seasonal expenses (property taxes, insurance premiums).
If these expenses fit under the income streams and distributions you have available, then the next step is to continue to maintain your budget throughout your retirement years. If they do not, then you may need to increase income, decrease spending, or even potentially work another year. We recommend creating a financial plan with an advisor. This helps you understand the different variables and options to make your retirement successful. If this interests you, please reach out to an advisor on our website by clicking the button below.