Retirement is something that many of us may strive to attain but most don’t think about until it’s too late. Retirement planning is a key factor that needs to be properly planned in order to ensure an income that you can live comfortably off of after leaving the workforce. One of the most important aspects of avoiding the dreaded financial crunch when you retire is by being meticulous in budgeting and making sound fiscal decisions.
Budgeting is important to retirement planning because it helps to ensure that expenses do not outstrip income during retirement years. This means making sure that you are living off of a reasonable budget that allows for necessary expenses while also ensuring that there will be enough income saved for healthcare, entertainment, travel, and other non-essentials.
To budget for retirement, one must first consider the expenses that are expected during retirement. This includes where you would like to retire to, if it will be an area of high cost of living or not and if you will be paying rent or owning a home. Other expenses such as food, healthcare, entertainment, and travel will also need to be accounted for.
Once you have an idea of what expenses you expect to have in retirement, you will need to estimate the income you can expect to have during retirement. This includes Social Security benefits, pensions, retiree health care plans, investments, annuitized savings, and other sources of potential income. Having a sound understanding of the sources and amounts of income expected in retirement will help inform your budget and help you plan what items are necessary and which are luxury items.
It is important to remember to be mindful of inflation when budgeting for retirement. Inflation can drastically reduce the purchasing power of money over time. This means that expenses that you may be able to cover currently may not be able to be covered at the same rate in 20+ years with the same amount of money. Estimating future inflation is difficult, but there are methods for attempting to do so such as investing in CPI related investments, or purchasing inflation-adjusted annuities.
Once expenses and sources of income are defined, priority must be given to the absolute necessities for retirement. This includes figuring out how much of your income needs to be saved for healthcare and other necessary expenses. After the necessities have been accounted for, budgeting for the other items can begin. This could include things such as budgeting for travel, entertainment, hobbies, and the like.
Finally, it is important to not forget to plan for emergencies. Emergencies can arise at anytime in life, and it is important to account for these potential expenses within your budget. It is recommended to set aside a certain percentage of income each month to cover unanticipated costs, such as medical bills and car repair.
In conclusion, budgeting is a key factor in successful retirement planning. It is important to ensure that expenses don’t outstrip income during retirement years. Being mindful of expected expenses, planning for future inflation, and budgeting for necessary and luxury items are some of the most important aspects of budgeting for retirement. Lastly, it important not to forget to account for emergencies so you can have peace of mind and be ready to tackle life’s unexpected expenses.