I’m not a skydiver, but doesn’t it just make sense, that before you jump out of a perfectly good airplane, you make sure you’ve packed your parachute really, really well? You’ve finally decided to pull the trigger and make it official. You are RETIRING! With retirement you are faced with a whole new set of challenges and the biggest one you should focus on is setting up a budget. Now more than ever, you need to pay close attention to how you’re spending your cash.
The worst thing you can do, is bury your head in the sand and pretend like everything is OK. The sooner you get a clear picture of what your monthly expenses will be, the sooner you can take the bull by the horns and get your retirement spending under control. I promise, if you follow these simple steps, the process of creating a sound spending plan, should be much less painful than you think.
There are three types of expenses we all have. Fixed, Variable and Discretionary. Start by listing your Fixed expenses such as a mortgage payment, car payment, etc. The second type of expense is Variable. Just like your Fixed expenses, these are necessary and ongoing, however they may fluctuate from month to month. Things such as your electric bill, water bill and groceries are examples of Variable expenses.
Finally, Discretionary expenses are what will make you or break you in retirement. After planning for your Fixed and Variable expenses, you really should plan for Discretionary spending as well. Things like vacations, or dining out, going to the movies and even hobbies all make life enjoyable. But don’t get caught enjoying what you cannot afford and run the risk of jeopardizing your most basic retirement lifestyle.
Don’t forget to include expenses that may occur less frequently than every month. Things such as your homeowner’s insurance and property taxes, estimated repairs for your home or car, annual gym memberships, etc. For many people, neglecting to plan for these expenses may catch you by surprise and force you to put those charges on a credit card and that’s the beginning of the debt spiral that many people find themselves in.
Now that you’ve got a pretty good idea what your monthly living expenses will be, you need to see how much income you’ll have. First, list your ongoing income sources, such as social security, pension income, or income from real estate. If you have retirement investment accounts, like a 401k, you may consider using a 4% withdrawal rate as a metric to determine how much you can safely pull from your investments without running the risk of depleting your portfolio in retirement.
After calculating your income and expenses, if you find you are running short every month, you will need to make some tough choices and look for ways to reduce your Discretionary spending. More and more people today are “cutting the cord”, meaning they cancel their cable subscription and stream their favorite shows from Netflix, or Sling. Another way to save a few bucks is to drop your land line and only have a cell phone. If you have different accounts such as a 401k, Roth IRA or taxable brokerage you may consider strategically pulling from different sources to minimize your overall tax liability.
Getting control of your spending as soon as possible is critical to the success of a retirement income plan. I hope this information will offer some guidance to help you prepare your retirement parachute.