What to do With Your Budget When Preparing to Retire

Sandra Cleveland |

Budgeting is often regarded as something people should do when they are starting out on their own, earning an entry-level income, and that’s certainly true.  But a budget, or spending plan, is also important any time you experience a significant change in your income, especially when you are contemplating retirement. 

By the time they retire, most people have already accumulated the resources they will have to fund the remainder of their life.  Faced with the reality of no longer having a regular salary, most people need to change their spending habits in retirement, but are frequently unsure where to start.   

Here are four things to do when you’re planning a budget for your retirement years:

  1. Figure out what you are currently spending.  Divide your money into five main categories:
  • Living expenses - include utilities, telephone, internet, groceries, medicines, clothes, education, pets, home maintenance, gasoline, vehicle registration, repairs, parking, and public transport/taxi fares.
  • Debt - include home loans, auto loans, personal loans, credit cards, and any other debt.
  • Insurance - include life, health, home and contents, car, business, and any other insurance.
  • Savings - include 401k salary deferral, emergency funds, and savings for specific purposes.
  • Leisure and entertainment - include travel, eating out, gym memberships, subscriptions, books, music, and gifts.

For each item, list the amount you are spending and how often.  For example, you pay your mortgage once a month, but buy gasoline weekly. 

  1. Compare your spending with your resources.  Add up the total you are spending in each category and calculate what percentage of your income – or your expected income in retirement – you are spending in each category.  Will this level of spending be sustainable once you retire?  Crunch the numbers and determine if you have enough savings to ensure you don’t outlive your money. 
  2. Build your new budget from the bottom up.  The “top down” approach of deciding where to cut or increase spending is fine when a change to your income isn’t significant, but if you are anticipating a life change as major as retirement, it is best to start all over from scratch.  Don't start with what you're spending and decide what you are willing to give up; start with the income you are going to have and decide what you choose to afford.
  3. Start early and do an extended trial run.  Adjusting to not working can be a stressful transition, and you don’t want to make it harder on yourself by discovering too late that your spending plan isn’t going to work as you thought it would.  Start working on your new budget long before you retire, and try to live on it for at least a year.  That way, you will have plenty of time to find out if your budget is practical and realistic, and make any needed adjustments.

A budget isn’t restrictive; it’s empowering.

Many people tend to regard a budget as something that keeps them from doing what they want, but it’s the exact opposite.  Whether you use a pen and paper, an Excel spreadsheet, or an online service like mint.com that helps you maintain records, a budget makes it easy to monitor your spending and develop the habits you need to achieve your goals.  A budget is not a straightjacket; it’s a tool you use to harness and control your financial resources so they accomplish the things that are the most important to you.