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How do I create a retirement budget?

October 08, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Q: I'm approaching retirement, and I just can't seem to work out how to put together a retirement budget. It may be the psychology of not wanting to admit I'm ready for retirement, but I just don't seem to know where to start.

A: Maybe psychology is playing a role, but your dilemma is understandable. Budgeting for something you haven't experienced yet is not an easy thing to do, so why don't you start with your current budget? Put together a budget listing all the expenditures you have currently. Now, draw a line through all those that will no longer apply once you retire (such as commuting expenses, work tools or supplies). Then, add in budget line items for new things you plan to do in retirement (such as traveling more).

If possible, your retirement budget should be an evolution of your previous budget. Retirement may be new to you, but it's unlikely that every aspect of your life will change right away. So, start with how things are now, and adjust for the changes you can anticipate. Then, as you gain more experience with your retirement lifestyle, you can make further adjustments as you go.

There are a few reasons why budgeting for retirement in advance is important:

  1. How can you decide when to retire until you know how much money you'll need to live on? In effect, retirement planning is an exercise in working backwards -- you start with a retirement budget, then figure out how much savings you'll need to support that budget in retirement. You don't want to wait till after you retire to find out that you don't have enough money to support your intended lifestyle, and you won't know if you have enough until you've set up a retirement budget.
  2. You may need to shift some money from long-term investments to savings accounts or other conservative vehicles. People emphasize long-term investments in their retirement plans because they have the most growth potential, even though these investments are most vulnerable to fluctuating up and down. However, if you start withdrawing money from a growth-oriented portfolio, it tends to exaggerate those ups and downs. Therefore, as retirement approaches, you may want to downshift some of your portfolio from growth securities to savings accounts or short-term, income-oriented securities.
  3. You may need to keep more money in your checking account than you did previously. Having a weekly or bi-weekly paycheck coming in goes a long way toward meeting most people's liquidity needs, but once those paychecks stop, you may want to leave a bigger cushion in your checking account to meet near-term expenses.

Good luck with your budgeting exercise -- and with your retirement!

Got a retirement question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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