Blog, Lifestyle, Retirement Planning

Will I Have Enough Income? Your Answer Is in the Budget


For many Americans headed into retirement, the prospect of leaving behind the comforts of a paycheck can feel intimidating. Now, in retirement, along with gaining more control over the way they spend their time, they’re also coming back around to a task that many haven’t had to deal with since their younger working days: living on a constrained budget. Chances are, it was not a pleasant experience back then, and they are not looking forward to it now.

The problem many of us have with budgeting is that it feels limiting and, sometimes, guilt-producing. The common idea of a budget is that it tells you how much you’re allowed to spend and what you’re allowed to spend it on. A budget also reminds you that your income resources are limited, and you’ve got to fit your expenditures within that threshold. Sometimes, a budget can even feel like a sort of monthly tattletale, shaking its finger at you for making that extra Starbucks stop or ordering that extra dessert at your favorite restaurant.

Actually, though, it’s probably more helpful to view your retirement budget as a tool for relieving stress and worry. When you’ve totaled up your income resources—including Social Security, any pension income you might be entitled to, and income available from your investments—your budget can help you make sure you’ve got sufficient cash flow to allow you to live the retirement lifestyle you’ve planned. As long as you’ve got an accurate take on your inflow and outflow, your budget, instead of feeling like a scold, can feel more like a friend who’s telling you you’re on the right track.

The other good news for retirees getting back into the budgeting game is that there have never been more easy and convenient tools at your disposal to help you keep your budget on track and top-of-mind. Now, most banking apps allow you to linking to your bank and credit card accounts and can even automatically place your expenditures into their proper categories. Once you’ve tweaked your categories so that they accurately reflect your monthly spending cycle, keeping track of your budget can be as simple as checking an app on your smart phone.

One framework that many have used successfully is the 50/30/20 framework, which is as simple as it sounds. The first 50% of your monthly income is allocated to your needs—basic expenditures like food, housing, transportation and similar costs. The next 30% is allocated to “wants”—things like dining out, travel, buying gifts. Then, under this formula, the last 20% is allocated to savings and debt repayment. Now, most retirees are unlikely to be repaying their student loan debts, and it is to be hoped that they don’t have large unsecured debts like credit cards and personal loans that are claiming outsized portions of their monthly cash flow. In other words, for retirees, that last 20% can become a kind of safety net for various unplanned expenditures, like car repairs or potential healthcare expenses (always a needed consideration as we move into our later years).

But of course, retirees aren’t getting a regular paycheck, which means they need to calculate how much of the money needed to maintain their desired lifestyle will need to come from retirement savings and other investments. One of the most valuable services we provide our retired clients, in fact, is performing the type of analysis needed to both project the amount of income a portfolio can generate, and then extrapolating that projection into the future to allow for various potential scenarios.

Another way to start getting a handle on what your monthly cash flow picture will be like in retirement is to tote up all the basic living expenses. Next, take Social Security, pensions, and other stable income, and allocate that to the “needs.” Can you expect to handle your basic expenses from reliable sources like Social Security and pension income? If not, then the extra dollars needed represent the amount that the retiree would have to take out of the retirement portfolio in order to maintain the desired lifestyle.

So, to summarize the steps for analyzing your monthly budget in retirement:

  • Calculate your monthly retirement income goal;
  • List your expected spending
  • Identify expenses that are likely to change in retirement (some, like gasoline purchases, may be less; while others, like healthcare costs, may be more);
  • Factor in any anticipated lifestyle changes (bigger allocations for travel, for example);
  • Estimate your retirement income from all available sources.

At this point, it can also be a good idea to make a “trial run” with your retirement budget, even before your retirement officially begins. By “road testing” your monthly budget, you may be able to spot areas that need more analysis, to find expenditures that can be reduced, or discover other aspects that can be tweaked to make better use of your available resources.

At Aspen Wealth Management, we have the tools and the expertise to help you make better predictions of not only your needs in retirement, but also of the optimal ways to deploy your resources for meeting those needs. When you’ve got a plan that is based on the best available data, it can take much of the worry and stress out of preparing for retirement. To learn more, visit our website to read our article, “Retirement Lifestyle: Downsize, Relocate, or Stay Put?”

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