Financial Focus - Retirement: Budget or Bust

November 04, 2019
Angela Baker, JD, CFP®, CLTC, CASL®

If you plan to retire in less than 10 years, will your financial resources, your “nest egg,” be enough to maintain your desired lifestyle in retirement? When asked, most pre-retirees expressed concern about affording health care, making debt payments, managing expenses, and generally not running out of money. While the popular credit card commercial asks “What’s in your wallet?”, without proper planning, some retirees could be left asking “What’s left in my wallet?”

Even those with significant pre-retirement wealth share these concerns. Regardless of your current financial status, now could be a good time to create a planned retirement budget. Failure to do so could be the single greatest risk to long-term financial security.

For many, there is a difficult transition upon retirement from receiving a regular paycheck to creating their own “paycheck” from retirement savings. With a limited pool of assets to generate income, expenses could start to deplete balances. If this starts to happen, you may need to go back to work, or  adjust spending, or a combination of both. A better plan is to think about your budget before retirement rather than have to pivot afterwards.

To start the budget process, begin by envisioning the retirement lifestyle you want. Prioritize expenses beginning with essential needs. These expenses could include the following:

Potential Expenses
Primary residence Existing debt
Groceries Dependent care (parent or child)
Clothing Taxes
Medicare costs and costs for medication and supplies Insurance (auto, life, long-term care and health/medical)

Review current bills and financial statements to determine average monthly spending and consider costs that could increase, decrease or be eliminated upon retirement. The value of this exercise is that it will reveal the categories where you currently spend the most and allow an opportunity to make meaningful pre-retirement adjustments. Your nest egg should, at a minimum, be able to provide for essential expenses.

Beyond the essentials, a retirement budget should also include an emergency fund, discretionary expenses, and possibly a legacy for your loved ones. An emergency fund should be able to comfortably cover 3 to 6 months of the essential expenses. Discretionary expenses are those that enhance your lifestyle, but are not technically essential. These could include vacations and travel, dining and entertainment, hobbies, gifts, and charitable donations. All of these expenses combined should reflect your annual spending in retirement. A very basic rule of thumb is that this amount should not exceed 4 percent of your total nest egg.

It is important to note that during retirement your expenses will change as your needs change and evolve. If you are concerned about healthcare costs, you may want to consider additional planning to make sure your needs are covered.

In addition to living expenses, now is the time to consider if you want to leave a legacy or specific bequest to loved ones. If the budget allows, you should plan this expense in advance. Depending on the size of the bequest, you may want to work with professional advisors, including an estate planning attorney, insurance professional, philanthropic advisor, and a financial advisor. 

The transition into retirement gives rise to many concerns for most pre-retirees. The common thread is the concern about the cost of retirement — can they afford it? If you want to minimize what could be the single greatest risk to your long-term financial security, create a thought-out, realistic retirement budget well before you retire.

If you would like to discuss preparing your retirement budget in greater detail, please reach out to a member of the financial planning department or your West Financial Relationship Manager.

Meet Angela Baker, JD, CFP®, CLTC, CASL®.

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To view other articles in the November 2019 Financial Planning Focus newsletter, click here.

Important Disclosures

West Financial Services, Inc. is an SEC registered investment adviser. Registration with the SEC does not imply a certain level of skill or training.

Information contained herein was derived from third party sources including, but not limited to, Bloomberg, Standard & Poor’s, Dow Jones & Company, the Federal Reserve Bank of New York, and Morningstar, Inc. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Please contact us if you would like to obtain a copy of the third party sources.