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July 2, 2020
The Scottish poet Robert Burns famously said, “The best-laid plans of mice and men often go awry.” That’s true about almost everything that you undertake in life. However, hoping for the best isn’t the greatest retirement budget strategy. You need a real strategy, and one that’s based on your life now (and the life that you want to have later).
Creating an impenetrable budget is something to strive for. You’ll surely have a few hiccups along the way. But aiming higher–and preparing for more than the minimum that you think you’ll need–will help those hiccups be a short-lived annoyance (rather than a situation that alters your whole retirement).
Debt is inescapable for most people, but the closer you get to retirement, ideally, the more it should start tapering off. The goal is to be as debt-free as possible once you retire. Certain expenses, such as utilities, will continue; you can only reel them in a bit. Some of them, such as the costs involved with commuting to work, will drop off. But debts are where you have a lot more control.
Think about each of your debts and how costly they are to maintain. You’ll want to eliminate as many of the expensive debts as you can, and as soon as possible.
Your mortgage, if you have one, probably has a much lower interest rate than your credit cards. Credit cards are more expensive to maintain than a mortgage, even though a mortgage is long-term debt. Credit cards can also bleed money from your budget now, which reduces your ability to save.
Nearly every retirement advisor recommends paying off expensive debts such as credit cards as soon as you can, and there’s a good reason why. Keeping a high balance hurts your credit score, and making only the minimum monthly payment means you’ll pay back a small fortune in time.
The NewRetirement retirement budget calculator lets you immediately see the impact of getting rid of debt. Try a scenario where the debt is paid off now. Then try a scenario when you pay off the debt early. The system lets you play with your finances so you can see for yourself the short and long term impact of different money strategies.
A $2,000 credit card balance at 13% interest rate–and a $41 monthly payment–will take you 69 months to pay off. (That’s almost six years). That’s six years without using the card at all, while the card issuer continues to bring in 13 percent interest on the existing balance. By the time it’s paid off, you will have paid back the balance, plus nearly $900 in interest.
Focus hard on expensive debt the closer you get to retirement, and pay it down as quickly as you can. That $900 you paid in interest could work for your benefit in an IRA.
There are some things that you can plan for with a reasonable amount of certainty. That’s where your retirement budget will get a lot of its structure. If you’ll still have a mortgage payment, that’s one item to count on–property insurance and taxes, too. A vehicle payment might also be included, but most vehicle loans are paid off in a few years after financing. Other expenses will likely never go away. These make up the more fixed budget items.
Some of these expenses aren’t any surprise: your electric, gas, and other utilities will remain. You’ll probably want cable and the Internet, too. The same goes for phone plans and your grocery bills. Clothing may not be as much of an expense once you retire, but you’ll still need to budget for it the same as you do now.
Other expenses could skip your initial budget plan. If they don’t make the cut, they’ll cut into other areas. Lawn maintenance, for example, might not be an expense at all right now. But what about 10 years after you retire? All home maintenance could become an issue at some point, and you might want to hire it out.
Another expense that you should plan for is health care. While Medicare is available, it’s not entirely free. For example, Medicare Part A–which covers hospital care, skilled nursing care, and similar needs–doesn’t have a monthly premium for many people, but the in-hospital deductible is very high.
Long-term care is another concern. With life expectancies growing longer all the time, chances are you’ll need some type of assistance or long-term care one day. According to Genworth’s Cost of Care Survey, on average in the United States, a private room in a nursing home costs $8,365 per month, or $275 a day. But if you add a Federal Long Term Care Insurance Program, premium to your retirement budget, long-term care may be covered.
The NewRetirement Retirement Calculator offers much more than a typical retirement budget worksheet. This system lets you create different tiers of spending for different time periods in retirement. It also lets you plan for healthcare costs and gives you multiple options for how you might want to plan for long term care.
Planning for the unexpected almost sounds like a catchphrase. How can you plan for something that you can’t predict? Some unexpected expenses will almost certainly come from outside sources, but many will just be part of your life as it unfolds (the same as it does now). You might not know what’s in your future, but you can safely bet that you will have unexpected expenses of some variety. When one of them pops up, an emergency fund in your budget can be a lifesaver.
More and more adult children move back home now than in any other recent generation. And for adult kids who are out on their own, a lot of parents still offer financial help. Whether it’s $100 here and there–or a regular contribution to help pay a debt–you’ll probably need to account for the possibility of helping out your children or another family member at some point.
Emergency expenses are where your budget can really take a hit if you haven’t planned for them. Think about how old your roof will be when you retire. Most common roofing materials have about a 20-year lifespan. Home appliances, such as your HVAC unit, stove, and refrigerator won’t last forever, either. And what about your car? It’s probably going to need repairs.
Something else to think about is the way that your attitude about retirement might change once it arrives. What happens if three years later you decide that you want to open a small business or sail around the world? For someone who had envisioned staying home and taking up hobbies, that might be a real surprise. If you cut your projected retirement budget too close, you won’t have any wiggle room to pursue new interests.
It’s always smart to save more than you think you’ll need in order to expand your budget as much as possible. The only thing that you know for sure about the future is that you can’t predict most of it. You’ll have regular doctor visits and grocery bills. But you might also want to visit Europe, open a botanical shop, or go back to college.
Planning a retirement budget is similar to your budget before you retire, but the differences aren’t slight; they’re important. Without a regular income from employment, the security that you fall back on now won’t be there. Your income will be of your own design, plus the benefits that you receive from Social Security.
In some ways, that’s more secure than a job because you saved the money and financed your own retirement in advance. But without a strong retirement budget, your money could dwindle faster than you expected, leaving you unprotected later. Stay involved in your retirement budget, both now while you’re planning it and later while you’re living it. Stay alert to areas where you can cut back and watch for trends, such as regularly overspending at lunch, that can put a dent in your funds.
Most of all, remember that retirement is personal. No one else has a budget that’s right for you. But NewRetirement can help you design one that is. Try out our retirement calculator today, and start on a path toward a workable, reasonable budget that secures your interests for the long term.
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