Retirement frees your time and energy to use as you please. But unless you’re one of the lucky few to retire with more money than you can spend, you’ll need to strike a balance between wealth preservation and personal gratification.
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Identify Your Current Expenses
A realistic budget is often more about expenses than it is about income. A good first step is to figure out how much you’re currently spending. To start, gather up your most recent bank and credit card statements and sort each expense into one of these categories, many of which have been cited by financial experts including Dave Ramsey:
- Housing, including rent or mortgage, plus maintenance, insurance, property tax and HOA fees, if applicable
- Food, including groceries, takeout and meals away from home
- Utilities
- Healthcare, including insurance and medical expenses
- Personal care/grooming, including clothing
- Transportation, including car payments, insurance and upkeep, and/or taxis, rideshares and public transportation
- Debt payments other than your mortgage and car payments
- Saving and investing
- Entertainment, including subscriptions
- Hobbies and activities
- Travel
- Charitable donations
Also create a category for expenses you pay quarterly or annually, and enter 1/12 of their total to get their monthly cost. Unless you use credit or debit for all your purchases, you’ll also need to track cash spending for a month. Add each purchase to one of the categories listed above.
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Estimate Your Retirement Expenses
Your spending will change after you retire, so look at your current expenses and try to anticipate how much you’ll need to add, or how much you can subtract, from each category.
For example, work-related expenses such as transportation and clothing might fall. Spending on travel and entertainment might increase, as will healthcare costs. In fact, the average annual healthcare expenditure increases by about $2,300 once you cross the age-65 threshold, according to the U.S. Bureau of Labor Statistics.
Calculate Your Retirement Income
Your retirement income will likely include Social Security. You can get an estimate of your future benefits by registering a my Social Security account on the Social Security Administration website.
Other income sources might include pensions and distributions from your retirement accounts. A standard rule of thumb is that you can withdraw 4% of your retirement savings, plus an additional amount to counter inflation, per year.
Also, remember to include taxable investment accounts and personal savings.
Subtract Retirement Expenses From Retirement Income
This is the moment of truth. If you have income left after subtracting your expenses, great! Your budget is OK as is. If your income falls short, you can still budget for lifestyle expenses you enjoy, but you’ll have to make some compromises.
Making the Budget Work
A series of large and small changes can go a long way toward adjusting your budget to allow for a gratifying lifestyle without spending down your savings too soon.
Fidelity recommended looking at big-impact changes like downsizing your home, avoiding new vehicle purchases and eliminating vehicles you can live without after you retire. But small changes can make a big difference, too.
Review your retirement expenses to see where you might cut back. Perhaps you could alternate between subscriptions rather than pay for multiple services each month. Or shop around for better prices on insurance, mobile services and utilities. You might even have sports and fitness memberships you won’t need once you have time for a more active lifestyle.
If you’ve not yet retired, socking away some extra money each month will give you more funds to enjoy after retirement. If you’re already maxing out your individual retirement account and 401(k), consider a personal brokerage account, certificate of deposit or even an annuity for that purpose. You might even consider a side gig to bulk up savings now and provide extra income in retirement.
It might take some tweaking to get your budget right. The U.S. Department of Labor has a series of worksheets located here that make it easy to see how various adjustments affect the big picture.
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This article originally appeared on GOBankingRates.com: How To Set a Realistic Retirement Budget Without Sacrificing Your Lifestyle
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