Budgeting Before You Retire And Planning For The Future

| August 26, 2021

Trying to estimate what your expenses will be during retirement can be challenging. It’s difficult to plan for inflation and to predict the costs of essential expenses in the next 10, 15, 20 years, or more. However, trying to come up with a spending plan for your retirement is crucial, as the earlier you start saving for your future, the better off you’ll be.

Budgeting for retirement now, while you are still working and earning a regular income, is the right thing to do if you don’t want to run out of money during retirement. It gives you more time to plan for the future and more peace of mind.

To help you tackle this task, here are six tips you can follow.

1. Budget for your big three expenses: housing, transportation, healthcare

Now and during retirement, your big three budget items will be housing, transportation and healthcare.

  • Housing: Do you own a home and see yourself living in it until retirement? Or will you be downsizing or renting instead? If you are a homeowner, consider the upkeep based on the size of your property. You also need to allocate the costs of making your home elderly-friendly in case you plan to age in place when the time comes. If you will be renting or living in a retirement home, you should adjust your budget accordingly.
  • Transportation: Will you be driving your own vehicle or taking public transport? Your transportation expenses depend upon where you plan to live come retirement. If you plan to travel once or twice a year, you should also factor that into your calculations.
  • Healthcare: Medical costs tend to eat up a huge chunk of a person’s retirement budget, especially if they lead a generally unhealthy life. While living well by exercising, getting enough sleep, sticking to a balanced diet and avoiding alcohol and tobacco won’t give you 100% assurance that you’ll be healthy all your life, doing so can keep lifestyle-related diseases at bay. These include obesity, hypertension, heart disease, type II diabetes and lung cancer. Therefore, aside from saving for retirement, strive to lead a healthy lifestyle today. And, to help manage your medical expenses in the future, invest in good health insurance as well.

2. Consider budgeting in yearly or five-year increments

If you’re in your early 40s right now, it could be really difficult to visualize how much you’ll be spending every month two decades from today. Therefore, in figuring out your monthly retirement budget, consider first how much you’ll be spending during your first year (or first three or five years) of retirement.

Once you determine your first retirement year expenses, it’ll get a bit easier to calculate for the succeeding years. Again, retirement financial planning is not an exact science, but you need to start somewhere reasonable.

3. Consider the phases of your retirement

Since your needs at every stage of retirement may change, consider these phases while budgeting for the future.

  • Stage 1 (Transition): The stage where you transition from working to retirement is not full-fledged retirement itself. The transition phase could see you working part of the time or providing consulting services. During this time, your expenses are likely to stay the same and you’ll still have an income stream, albeit at a reduced level.
  • Stage 2 (Early Retirement Proper): When you get to the second stage, this is the time when you’ll be focused mainly on leisure, relaxation or having fun. If you stop working altogether, you will find yourself having a lot of free time and more opportunities to spend money than you normally would. You may be indulging in hobbies, so you’ll need to budget for hobby-related expenses. You could start travelling more, too, so that could be a significant expense.
  • Stage 3 (Later Retirement): As you continue to age, your health could also deteriorate or you may find yourself slowing down. Instead of travelling, you might find yourself feeling content puttering around the kitchen or tending to your garden and pets. If you have health conditions, you need to allocate money for medical exams and prescription medicine.
  • Stage 4: This phase usually involves the last two years of life – which can get quite expensive if you become seriously ill. It’s not a pleasant stage to think about, but you need to take a pragmatic view and consider all the expenses that come with hospitalization and dying.

4. Prepare for one-time major retirement expenses

Just like your spending today, once you set your retirement budget, most of your monthly expenses would fall into the same categories, although there may be some fluctuations over the years.

The rest of your retirement spending, however, may involve major one-time costs such as:

  • Helping with your child or grandchild’s college expenses
  • Yearly or biannual travel overseas
  • Purchasing a second property
  • Funding or contributing to the expenses of elderly parents or a child’s wedding

5. Clear your debts

Remember that you can’t really focus on saving for retirement if you have a lot of outgoings and outstanding loans or debt. This includes your mortgage, personal loans and credit cards.

Therefore, by prioritising debt right now and paying it off, you can start saving for retirement earlier. Of course, the opposite is also true; the longer you put off paying your debts, the longer you will also be delaying your preparation for retirement.

6. Budget for emergencies or unexpected expenses

Just as people are advised to keep an emergency fund pre-retirement, the same advice holds true for retirement financial planning. So, aside from calculating your future monthly expenses, it’s wise to keep an emergency buffer for unexpected costs.

Sudden hospitalization or healthcare-related costs tend to be substantial, whatever stage of life you may be in. Therefore, if you can afford it, factor that in. For whatever emergency expenses may arise when you retire, try to set aside an amount equivalent to three to six months’ worth of living expenses.

Start early and plan today

As they say, no one knows what the future holds.

But you can make your retirement comfortable by planning for it as early as possible. 

So, start saving for the future now. Today.

Note: This informative budgeting before you retire article was contributed to Leisure Freak by Karan Mahindru.

Tags: , , , , ,

Category: Personal Finance

About the Author ()

Leisure Freak is a site dedicated to those who are truly passionate about reaching financial independence and early retirement. Not just the traditional definition of retirement, but a new passion-driven retirement.

Comments are closed.