Whether you are already fully retired, working part time, or still a few years away from leaving your job, it is never too early to build a retirement budget. You may hate the idea of keeping track of what you spend. You may think you know what you income and outgo are. But until you put in on paper (or in a software program) you are playing with fire.
So, what goes into a budget? How different is a retirement budget? Are there categories that were important when you worked full time that can be dropped when you are retired? How do you plan for retirement?
To give you some idea what might belong in your post-work budget, I will use mine as a sample. Since your situation is likely to be different please just use this as a starting point.
Mortgage payments (I own my home but you may have monthly payments)
Real Estate Taxes and HOA fees
Home Owners Insurance
Utilities: electric, gas, water, sewer/trash pickup
Home maintenance and repairs, pest control
Food and household supplies
Internet, cable or satellite TV
Decorations & furnishings
house cleaning service
Auto: payments, gas, repairs, insurance, registration
Health insurance: premiums, uncovered expenses, co-pays
Health supplies: over-the-counter vitamins & medicines
Dental care: checkups, fillings, crowns, dentures, etc
Eyeglasses & hearing aids
haircuts & beauty salon
Computer purchase, repair, software
Subscriptions, postage stamps
Tax prep and accountant costs
You may be surprised at all the categories I maintain. A budget after retirement isn't much different from one you used while working full time. It is quite easy to forget that a majority of expenses don't go away. The amount you decide to spend in each may change, but the actual number of categories is pretty much the same, retired or not. And, don't forget to plan for inflation in virtually every category.
Which categories did I overlook? Which ones would you delete or add?
I like your budget breakdown. I've decided to add a separate category for pet care to mine. Our pet expenses are beginning to look like what once was our childcare expenses. Well worth it though!ReplyDelete
Your detail list looks very similar to ours, other than we have an accruing account for large scale purchases and repairs (autos, new roof, new fencing, etc.).ReplyDelete
I am curious, however, as to why you pay for life insurance in that you are now retired and therefore without future earnings that need protecting?
Good question. We have decided, at least while the grandkids are still as young as they are, to provide some extra money for them if we both die early. The cost is quite reasonable (term) and we will drop it when the youngest reaches 12.Delete
This raises a major question I have had since we both recently retired. While working we had life insurance through our jobs. Should we budget this extra expense now even though we are primarily living on social security? Although we are comfortable and have savings and IRAs we are living on a very tight budget. My primary concern in regards to life insurance isDelete
covering our final expenses. However, I keep reading that funeral/burial insurance can be risky. I would love to hear your opinion and the opinion of others on this subject (life insurance/final expenses). In fact I have even thought about asking you to consider devoting a post to this. Being in the early stages of our retirement we really want to do this right and hopefully remove some of those worries! Once again - thank you Bob!
Bonnie, let me do some research on that topic to see if there is enough to turn into a full post.Delete
Most folks our age do not have life insurance. Once the kids are gone and you are living on your retirement/SS accounts, the need for the insurance diminishes. The smallish term policy we have is strictly for a little extra for the grandkids to help with college, etc., if we aren't around. Frankly, if we didn't already have it we would not have bought the policy since our daughters should inherit enough to be fine. But, for the cost we thought we'd keep it for another 4-6 years.
Instead of a specific burial/funeral insurance policy, how about a simple, $10-$25,000 term policy through someone like AARP? There is no physical and the cost is reasonable. Or, you could save the premium each year and put it aside for that purpose. If you plan on staying with us for another decade or two, the amount you save would make a major dent in the expenses for your heirs. I think most term policies do increase premiums every 5 years or so and most have an end date, meaning they expire when you reach 80 or 85.
Give me some time to do some work and watch for a post.
Thank you Bob! Your blog is very helpful to many of us retirees. Especially in these uncertain times!Delete
Bonnie, there are many horror stories out their about specific insurance products like burial insurance. Many of these products are bought years in advance, and might include burial plots and the like. Probably aren't worth the paper they are printed on after a certain amount of time. Cemeteries are sold to conglomerates that renege on the former's obligations, costs rise so much that businesses find a way not to honor the original contracts, and in some cases people no longer want or desire the product that they purchased originally (e.g. you do not want to be buried in that specific cemetery due to no one living in the vicinity anymore, etc). I would avoid specific policies such as this one like the plague.Delete
I keep my budget on a post it note! Works for me. My income, expenses are done bimonthly, use aggregate categories,e.g, bills includes insurance, cable, cleaning service. Then funds are deducted as used or rolled over to accumulate. My two items that I don't see addressed above are an emergency fund and car replacement. I use the first to unexpected, large expenses. The second is car payments I make to myself so I can pay cash when I need to get a new car.ReplyDelete
My wife uses post it notes for most of her projects and reminders, but I'd have problems trying to use her system for budgets!Delete
We have enough in the bank/investments that we don't have an emergency fund or car replacement fund as separate items, but that is normally a very good idea. In fact, my financial advisor asked me how many more cars I thought we might buy before we reach the no-drive age so she could be sure money was available in cash for that purpose.
We have five savings accounts that receive a set amount every month for future expenses : dogs & gifts, Propane, clothing &decorating&garden, house repairs and, taxes &insurance (the largest account). Most of the things you have listed are in our monthly budget.ReplyDelete
We also budget for: allowances (no guilt spending money. Hubby uses it on tools. I spend it on the kids.), travel and, take out. We do the envelope method for these so there is no overspending.
Wish we could still contribute to IRAs. Retirement will probably be a thirty year time period for us and neither of us want to work for pay again.
My daughter is just learning about budgets. My son married a budgeter. Both are on their way, knock on wood, to a good retirement.
Betty and I have monthly allowances (WAM, or walking around money) that is spent on whatever we want above and beyond other categories.Delete
For those who are pre-retirement, I would add long term care insurance. Not sure how affordable it would be post retirement age.ReplyDelete
Long-term care insurance is an interesting topic. Many of the companies that sold that product have exited the business while those that remain have increased premiums. My hesitancy is that you are depending on a private insurance company to still be in business and live up to their promises when you need them.Delete
We discussed the viability of LTC and decided to pass, but Betty and I understand we are taking a bit of a gamble with future costs.
When I was working, I had an opportunity to purchase a LTC policy being offered by my employer. It is a group plan, so the cost is lower. Also, I didn't have to go through a physical exam and pre-existing conditions were overlooked as long as I purchased it during the first enrollment period that the plan was offered.Delete
I am retired and the costs have gone up for the premium but I still think this is a good option for my situation at this time in life. Of course, with all that is going on in DC with health care proposals, I will have to stay vigilant and consider weighing whether I should continue to hold onto the LTC plan.
I have been using a Quicken type app for more than 20 years now where I enter all our expenses but I don't really do budgets as such. My wife and I are just naturally frugal when it comes to spending and my income continues even after 17 years of retirement to exceed my spending on a monthly basis. We keep our cars forever, don't take expensive vacations, and don't see the need to do costly upgrades to our paid off home as so many seem to do.ReplyDelete
I guess if anything I should have a budget that encourages me to spend more! How is that for a contrarian lifestyle... I am blessed with a pretty good monthly pension check, social security, and a self funded 401k which really hasn't been touched except for a RMD this year.
You are in a good position.Delete
I still have another 2 years of extra payouts from my parents' estate, so I have not had to take anything out of my IRA yet. I don't reach RMD age for 3 more years, though my advisor suggests I start taking some out beginning next year so the size of the RMD is reduced somewhat at 70.5 years old.
At least to this point, my investment growth are outpacing my expenses by a healthy amount.
Why don't you convert some of your traditional IRA to a Roth IRA? You could name your chidren or grandchildren as beneficiaries. You could do it for the next 3 years before your required minimum distributions.Delete
Thanks for the idea. I will check it out.Delete
I don't have complex incomes or expenses so I do not keep a formal budget. I do use a spiral school notebook to periodically (but not daily or weekly) keep track of funds in checking and savings.ReplyDelete
I don't have a problem with the desire to excessively shop or buy things so staying mentally aware of my spending works fine. Well ahead I do make reminder (be aware!) notes in my notebook of upcoming due dates for larger expenses--home insurance paid yearly, auto insurance paid every 6 months, and license tag paid yearly (tags in my state are outrageous). Sometimes I'll subtract the payments in advance of their due date, to keep it clear to myself what I have available versus what is committed. Fortunately I don't have monthly mortgage or car payments to keep track of.
What works best for me is to deposit all income to savings, not checking. For example, my social security check goes directly to savings, along with any transfers I make from other retirement funds. My RMD will go there when necessary.
For a brief period I fooled with putting most expenses onto a debit card before realizing that required too much monitoring, especially since my deposits go to savings and the debit card draws from checking. What I do now is put all expenses possible onto my credit card, and then pay off the entire balance by a transfer from savings at the end of the month. This is very liberating, and the statements keep a very accurate account of my expenses. I also get "reward points" that allow me to get small gifts for myself from time to time (I recently got hiking poles this way). I carry minimal cash and usually write only one check a month, my electric bill, as they charge 3.00 for paying by credit card! Knowing that I have a rule to pay the entire credit card balance each month, also helps keep a mental check on my spending.
I see you don't have a separate "entertainment category." Mentally I try and keep an entertainment budget or factor in mind. Instead of feeling bitten by a relative large cable/internet utility bill, I remind myself that this also includes an entertainment factor--streaming videos and online courses--since I seldom go out to see a movie. I also keep entertainment in mind when I spend on certain groceries (cheese, wine, etc) as dining out for entertainment isn't something I regularly do in a small town.
There is an entertainment category listed under the personal heading, but we have really moved to a combination of the entertainment and dining out categories since we view a meal out as entertainment. Usually it is too much effort to divide that part of the budget into separate entries, so the reality is we view them as one.Delete
WE pay off credit card bills in full, too. I put 95% on one card that gives us 2% cash back. Recently, we switched to a card that gives airline miles and has a 50,000 mile bonus after 3 months. Because we expect to fly more next year this seemed like a good switch.
At the beginning of the year I put the amount we will need for regular monthly expenses in a special checking account. Once a month I shift over the budgeted amount into the daily checking account. When combined with Social Security, that covers our budget. Extras or surprises come from cash in the various investment and retirement accounts when needed. So far, so good.
Your technique for moving money is a good one. I may have to look into adopting that. Thanks!Delete
An additional item on my list is contributions each year to my kids' modest investment accounts, and to my grandkids' education accounts. The amount varies from year to year, but I try to contribute regularly, with the idea that it will grow over time.ReplyDelete
We did set aside a lump sum after each grandchild was born, so I don't budget for it yearly. But, I heartily applaud your loving gifts yearly, and encourage anyone who can to do the same for your family.Delete
MY budget consists of housing, art supplies, car insurance, art supplies, food, art supplies.......you get the picture.....maybe art supplies should come before food.....:)ReplyDelete
I know Betty would vote for that in our house.Delete
Every year I go through a spreadsheet that I originally found on Vanguard's website. A few of the items that they include that might apply to some, but not all, include:ReplyDelete
1. Loans - for example, I was offered a near 0% loan on my new Harley purchase a few years ago. I will always take a zero or near zero % loan if it is something I intended to purchase, but it still needs to be accounted for in a budget, along with any other loans people might have.
2. Alimony - unfortunate fact of life for some, whether it is an income or outlay.
3. Credit Cards - as someone who does not pay interest charges on cards, it doesn't really apply to me. But to others it might be a much larger expense involving interest that needs to be accounted for.
My 2 cents, Bob. Good article, and timely for many.
Thanks for mentioning credit card interest. The rate paid to roll over expenditures from month to month is a killer. While not everyone can do this, I think out goal should be to only put on a card what you pay off fully at the end of each month. If you aren't there now, set it as a goal. With the average for those carrying credit card debt from month to month over $16,000, the interest charges are nasty.Delete
There was a comment left that Google decided was spam so it was lost, but the gist was the importance of including pet costs in a budget. Absolutely, and that should be included for those of us with pets in the home. Bailey's medical plan costs $32 a month and food/treats add another $20 a month, so the annual cost is significant.ReplyDelete
I wonder about the LTC insurance. I appreciate that there's a difference between American and Canadian medical systems but it seems that if you have adequate funds for living expenses before a LTC situation, there ought to be enough funds for "basic" care. Death benefits are also available at the time of death in Canada, money that can be used to offset funeral expenses. I belong to a cemetery association where a plot can be purchased for $50. Of note, I've seen many more situations where there is no funeral service. Also, I've heard of families buying life insurance on their elderly relatives to cash in at the time of their deaths. OMG! Back to the basics of this post - there are many expenses that don't change in retirement so budgeting is still a necessity.ReplyDelete
The key is "if you have adequate funds." American Medicare doesn't pay for long term care. It does pay for a period each year of nursing and hospice care, but not for something like assisted living. At an average monthly cost of $3,500 for assisted living and $6,500 for nursing care, savings can be drained pretty quickly. That is what makes LTC insurance attractive to some.Delete
In terms of death, my parents were cremated, and Betty and I have the same desires. There is still over $1,000 in costs, but nothing like an expensive casket and full blown service.
Whew...OK, back to sunnier thoughts!
I'm a lifelong budgeter and a lifelong saver. When I first retired, the idea of spending down my savings rather than building them up made me very anxious. In the end, I've decided to keep budget lines for savings -- for travel and large expenses. That way, I can see how much money I have accumulated for something like travel and not worry about overdoing it.ReplyDelete
I couldn't help noting how relatively inexpensive assisted living and nursing care are where you are compared to the northeast. Here it is more like $6000 per month for assisted living and $10,000 for nursing care. -Jean
Wow....numbers like those might make taking a risk on a LTC policy worth it.Delete
Our budget is very simple. So much for the house; then we spend everything else. If we have money left over at the end of the month we save it for next month in case we go over. Seems to work for us.ReplyDelete
Different strokes. That is a little to random for me, but if it works for you and B, then stick with it!Delete
Hey Bob - great post as always. I really enjoy reading up on your financial advice for retirees. I definitely agree that having a budget is essential for keeping a steady amount of cash on hand.ReplyDelete
I was wondering if you ever considered Housesitting as a means for travel and income. It is a low-maintenance job and has the benefit of free accommodation. Housesitters have the chance to experience a different lifestyle in a new location. I recommend visiting a website like Housesitter.com to view opportunities for you!
No, we have never considered doing that, but it seems worth exploring. I know about house-swapping, but house-sitting is something I haven't considered. Thanks!Delete