Rethinking Your Postretirement Budget

The way that you spent money before retirement is not necessarily going to be the way you spend after retirement. Many retirees don’t realize that when they transition to a life free of traditional employment, they must also design a budget that evolves with their lifestyle.

First Step: Consider Your Income

When it comes to income planning, the newly retired have an advantage over the working world: they know what their income will be through the years. They can look at their savings, now either tucked away into safe, stable investments or annuities focused on preservation of capital, and can get an idea of what they can afford to pay themselves each month. A working individual, on the other hand, is at the mercy of his or her employer and the overall job market and gets no real say in what he or she is paid.

But the advantage that retirees enjoy is also filled with its own set of potential downfalls—such as the question of how long their savings need to last, and whether their savings will stand up to potential disasters that create a need to spend more than expected in a given year. (Click here to find out how an annuity can take away much of these concerns by creating a guaranteed income for life.)

Even though retirees have a pot of gold at the end of their working-life rainbow, they should plan to dribble that gold out as slowly as possible so that they’re better equipped to handle the unexpected. In short, retirees should give themselves a general range for their income, based on annuity payouts or savings balances, interest and life expectancy, but ultimately realize that their income is dependent on their budget.

Second Step: Tweak the Budget

Before retiring, you have a certain way of spending money. Whether you realize it or not, that’s at least partially influenced by the fact that you know you have new money coming in. But when you retire, you are shutting off a source of new income, and relying instead upon all the nuts you squirreled away over your many years of working.

Relying on savings as your income for the rest of your life necessitates a re-evaluation in the way that you currently spend. After retirement, you may need more money to spend on your hobbies in order to occupy your day with activities you enjoy. You may spend less on commuting, new clothes and dining out, but you may want to spend more on travel and recreational pursuits. Creating a list of your financial priorities after retirement will help you better understand what truly matters to your postretirement self and is a great way to get a bird’s-eye view on the overall changes you need to make in your monthly budget.

Third Step: Monitor Your Progress

You may not be in saving mode anymore, but that doesn’t mean you have to enter reckless spending mode, either. After creating a postretirement budget and determining what income you’re going to need, it’s important that you set aside time every month or quarter to monitor your progress toward staying on budget. Additionally, you should watch your savings balances to make sure that you’ll be able to continue maintaining the same income with adjustments for inflation.

It’s the rare individual who can maintain the exact same budget after retirement as they did before, and it’s even rarer that one can set-and-forget their postretirement budget. Remember that your savings, income and budget are dynamic pieces of your overall financial picture. They need constant care, maintenance and supervision in order to bloom the way you ultimately want them to.