8 What About a Retirement Budget?

Penny hadn’t been very enthused about budgeting when she and her husband were both working. Sometimes, they fell a little short at the end of the month. But with both of them working, that didn’t happen very often, and they were always able to scramble out of their financial pothole pretty quickly. But as retirement approached, Penny felt more and more that she and her husband needed a clear monthly budget. After all, they not only had to ensure that they had enough in retirement benefits to pay their monthly expenses but also had to ensure that they didn’t deplete the retirement savings on which they might depend for as long as the next twenty or even thirty years. 

Budgets

Budgets play an important role in maintaining household finances. Budgets are useful whether you keep one in writing or only keep your budget in your check register, checking account balance, and head. One way or another, we need to know that we have enough money to keep a roof over our head, food on the table, and other necessities of life. You may instead wait for the utilities shut-off notices, eviction notices, overdraft notices, vehicle repossession, and collections notices if you wish. But you know that you’re far better off monitoring your income and expenses sufficiently to keep your household budget on track. And having a sense where you stand with respect to your household budget is no less important, and instead even more important, when you have retired. When you retire, you don’t have the ready ability to replace with earned income money that you didn’t have when you committed to spending it and thus should not have spent. Develop and stick to a retirement budget, if you want your retirement finances to work. Keep a roof over your head.

Expenses

As a prior chapter already suggested, the components of a budget include both income and expenses. That’s the point, to frequently compare income to expenses to be sure that your budget remains on track. Keeping a monthly budget makes sense because of the monthly expense obligations that households tend to face. Those obligations include monthly rent, utilities, cellphone, cable, and credit-card invoicing, plus monthly estimates of food, clothing, gas, and entertainment. Record all monthly expenses in your expense budget. You may also, though, have quarterly, semi-annual, or annual expenses for supplemental health insurance, home and vehicle insurance, real estate taxes, and income taxes. Divide those expenses into monthly amounts and record them in your budget so that you have a clear picture of all expenses. Go through your check register and credit card statements for other regular expenses to include in your budget. Adjust those amounts for what you believe will be your expenses in retirement. You then have a monthly expense budget. See more advice on budgeting, along with budget examples, in the similar guide Help with Your Money. 

Income

You’ll also need a monthly income budget for your retirement years. Start with your expected Social Security retirement benefit and any similar benefit for your spouse. Get estimates from the Social Security Administration of your retirement benefits for when you each expect to begin retirement benefits, understanding that your benefits depend on your ages when you start the benefit and your contributions across the years. Other factors figure into the spousal benefit. Put your anticipated monthly Social Security benefits into your monthly retirement budget on the income side. Also list for monthly retirement income any other amounts that you confidently expect to receive, whether from annuities, pensions, rental-property income, payments to you on assets sold, or interest or dividend income. Also include any earnings you are confident that you will receive from part-time employment or business activities that you intend to continue in retirement. If you expect annual, semi-annual, or quarterly payments or gifts, then figure their monthly value to add to your monthly income budget. These figures should give you a reasonable estimate of your monthly retirement income amount, to compare to your monthly retirement expenses budget. 

Maximizing

Consider maximizing your Social Security retirement benefit by choosing the best start date. As the prior paragraph briefly indicates, your retirement benefit depends not only on your income on which you paid Social Security taxes over the years but also on the age at which you start your retirement benefit. If you start retirement benefits at the earliest possible date, your benefit will only be a fraction of the benefit at your full retirement age. If you wait beyond your full retirement age to begin your benefit, your benefit can be a multiple of the benefit you’d receive by starting it at the earliest possible date. Of course, every year that you wait to start your retirement benefit is a lost year of benefit income. One way to choose the best date to start benefits is to use a benefits calculator to show when you begin to lose money by waiting longer, even though your benefit increases, based on your life expectancy. But those calculations depend on life expectancy, when you don’t know how long you’ll live. Thus, consider your own health condition, your need for the income, and whether starting earlier or later makes sense in your particular circumstances. If you are married, the spousal benefit also figures into the total household Social Security retirement income. Try to maximize your overall income, but know that it’s still largely guesswork. 

Equating

If your monthly income in retirement appears to exceed your monthly retirement expenses, without invading retirement accounts or savings, then great. You can leave your retirement accounts and savings untouched to increase in value as future bequests to your heirs, or you can expend those retirement accounts and savings to improve your lifestyle or on gifts or donations as you see fit. If, on the other hand, your monthly expenses exceed your monthly income, then you know that you’re likely to need to withdraw from those accounts and savings to make up the difference. And that’s fine, too. That’s in large part why you worked so hard and long, and saved so earnestly to build those accounts and savings, to ensure that you had enough for retirement. If you have a shortfall in income to make up out of your retirement accounts and savings, though, the big question is how much of a shortfall. If the shortfall is large and your retirement accounts and savings are small, then you may have a money problem in retirement. You may have some adjusting to do. 

Adjustments

Don’t panic over a first-glance retirement budget shortfall. Budgets often need work. Your first budget likely won’t be your final budget, especially if you have too large of a shortfall between expenses and income. Examine your expenses again to see what adjustments you might be able to make to lower your expenses. Housing can be a good place to start. Two earned incomes, or one good earned income, may have kept you and your spouse living in grand style during your work life. Your retirement income may not support the same lifestyle, especially as to housing, which is often the biggest part of a household budget. You may need to downsize in your housing. Cutting housing costs by a third or even a half can close the gap in many household budgets. If that means selling your paid-for home and buying outright a significantly less-expensive one, then you’ll also be adding to your retirement savings. A move to an area with lower cost of living may save on food, transportation, utilities, and other costs, in addition to housing savings. Examine the income side of your retirement budget, too. You may, for instance, be able to add a little part-time employment or small-business income, without unduly interfering with your retirement plans. Close the gap as much as you can with reasonable adjustments. 

Forecasting

You’ve already seen in prior chapters how useful projecting a retirement budget can be. A retirement budget can show you how much you need to save for retirement to make your retirement dream work. Once you determine from your retirement budget that you have a shortfall between your monthly expenses and your monthly income, and that you cannot further close the gap, try forecasting your shortfall. Multiply your monthly shortfall amount over the months and years of your retirement life expectancy. If, say, you retire at age 68 with a life expectancy of 14 years to age 82, then a $1,000 shortfall in your monthly budget would amount to $12,000 per year times 14 years, or $168,000 over the expected course of your retirement. A $2,000 shortfall in your monthly budget would amount to a $336,000 retirement shortfall, while a $3,000 monthly shortfall would amount to a $504,000 shortfall. If you have at least the shortfall amount in your retirement accounts and savings, you may be in the ballpark as to covering your retirement expenses. If instead, you don’t have the retirement accounts and savings to cover the shortfall, at least you know where you stand. 

Variables

Projections, though, always have variables. You won’t, for instance, be withdrawing all your retirement accounts and savings at once. Retirement funds that you haven’t spent yet should thus continue to grow, at whatever rate your investments are earning. In that respect, you may need significantly less in retirement accounts and savings than your total expenses across retirement. Earnings on invested retirement accounts and savings may make up the difference. But you don’t know the actual earnings rate. Your expenses may also go up considerably, either through inflation or changes in your health or other conditions. Investment earnings and inflationary expenses may roughly cancel one another out. Taxes are another variable. You may owe income taxes on your tax-advantaged retirement accounts, either when withdrawn to pay expenses or for required minimum distributions (RMDs). On the other hand, you may receive an inheritance or have other windfall income. You can spend considerable time and effort fine-tuning your projections, especially with the help of financial advisors and retirement planners. But they’ll still be projections subject to variation. 

Implementation

When you’re still working and saving for retirement, use your estimated retirement budget and your projections and forecasting to guide your retirement savings strategies. If you can cover any projected shortfall in your retirement budget with extra retirement savings from extra work, then try making that sacrifice. Do the best you can. And don’t feel as if you must start retirement with your whole budget satisfied and set in stone. Once you retire, you’ll begin to get a better view of whether your retirement budget was accurate. Don’t panic over occasional bumps in retirement’s financial road. You will likely have unexpected expenses. But you may also have unexpected reductions in costs and unexpected income. The peaks and valleys tend to cancel one another out, not every time, but often. You may also have big changes in your retirement circumstances that quickly change your budget calculation. A sudden or gradual disability and need to move in with one of your adult children, for instance, could completely change your budget calculus. The point of budgeting isn’t to take complete control of your life. You cannot do so. Budgeting’s point is instead to give you a guide for handling your finances. That’s all. 

Expectancy

One of the biggest variables in retirement planning is each retiree’s life expectancy. Don’t be too morbid about your life expectancy, as you near and enter retirement. Some people live to well over 90 or even 100 years old, much longer than they expected when entering retirement. Others pass away earlier than they expected when first considering or entering retirement. Mortality tables only show means and medians. No one knows. Use life expectancy only as a guide, which is all that it is, not as a death sentence, which it is surely not. If, for instance, you know that your savings are a little short based on your life expectancy, that’s no guarantee that you’ll run out of money in your last few years. Most expenses tend to go down as you age, other than healthcare and nursing home expenses, which may be covered by Medicare and supplemental health insurance. Budgets are to help you be as secure as you reasonably can, not to make you feel insecure. Keep everything in perspective. 

Reflection

Have you taken a look yet at your anticipated monthly retirement expenses? Do you expect them to be more or less than, or the same as, your monthly expenses when working? Have you taken a look yet at your anticipated monthly retirement income? Have you checked with the Social Security Administration on your expected retirement benefit at the age at which you hope to retire? Can you locate a benefits calculator online or get a retirement advisor’s help to suggest when you should start your Social Security retirement benefit? How close is your income to covering your expenses? If you have a shortfall, how big is it on a monthly and yearly basis, and over your retirement life expectancy? Can you close the gap by reducing your monthly retirement expenses or increasing your monthly retirement income? How does your overall shortfall in retirement income compare with your retirement savings? If you have a shortfall in savings, can you make that shortfall up before you retire? What variables do you think are most likely to disrupt your retirement budget? Can you reduce the risk of those events occurring, with lifestyle changes, insurance, or other actions now? 

Key Points

• A retirement budget is a key tool in ensuring adequate financial plans.

• A retirement budget should list your anticipated monthly expenses.

• A retirement budget should also list your anticipated monthly income.

• Maximize Social Security retirement benefits by timing the start date.

• Compare your monthly retirement expenses and income for a shortfall.

• Adjust your expense and income budgets if you can, to cover shortfalls.

• Forecast whether retirement accounts and savings cover shortfalls.

• Several variables could significantly alter your retirement budget.

• Implement your retirement budget for a few months to see if it works.

• Treat your life expectancy only as an average projection, not certainty.

Read Chapter 9.