Creating a Retirement Budget

Retirement represents not just the end of a career, but the beginning of a new chapter filled with possibilities. To truly embrace the freedom this phase of life offers, it’s important to lay a solid financial foundation through a well-structured budget. As you embark on this retirement journey, understanding the nuances of budgeting becomes paramount. In this blog, we delve into the essential elements of creating a retirement budget, essential for maintaining the potential for financial security throughout your golden years.

The Significance of a Retirement Budget

One of the fundamental pillars of a secure retirement lies in the creation of a comprehensive budget. A retirement budget serves as a guiding framework, helping to allow individuals to navigate their post-employment years with confidence and financial security. With the absence of a steady income stream from work, a carefully planned budget can act as a safety net, guarding against the potential uncertainties of rising healthcare costs, inflation, and unexpected emergencies. It helps empower retirees to potentially maintain their desired standard of living while reducing the risk of compromising their financial well-being.

Debunking the “80% Rule” Myth

The “80% rule” in retirement planning is a common suggestion indicating that retirees would typically require around 80% of their pre-retirement income to sustain their desired lifestyle during retirement. While this rule has been traditionally used as a baseline for estimating post-retirement income needs, it often fails to account for the dynamic shifts in spending patterns during retirement. In reality, retirees often tend to increase discretionary spending, indulging in hobbies, travel, and activities that were previously constrained by work commitments. Recognizing the individual nuances of retirement planning and tailoring a comprehensive budget accordingly is crucial for ensuring a potentially successful and fulfilling retirement journey.

The Power of Automation in Retirement Budgeting (Reverse Budgeting)

Decision fatigue can pose a significant challenge in retirement, especially when it comes to managing finances. To help alleviate this burden and foster a less stressful  financial plan, embracing automation is a key factor. This can potentially be achieved by establishing what is called “reverse budgeting.”

Reverse budgeting simplifies monthly income management by dividing it into two distinct categories: fixed expenses and variable expenses.

Fixed expenses comprise regular monthly payments that must be fulfilled consistently. Examples include mortgage payments, health insurance, utility bills, and car payments. On the other hand, variable expenses are not set in stone and can fluctuate from month to month. These include expenditures on groceries, travel, dining out, and other discretionary spending, which can vary based on individual preferences and changing circumstances.

Here are the steps to take to implement the reverse budgeting strategy:

1. First, open 2 checking accounts and designate one account as a “fixed account,” and the other as a “variable account.”
2. Next, go through all monthly expense items and categorize them as either a fixed expense or variable expense..
3. Set all fixed expenses to autopay and make sure these are being paid out of the “fixed checking account.”
4. Make sure that the fixed checking account is receiving enough deposits to meet all expenditures. For example, if the total of all fixed items totals $5,000 per month then this amount needs to go into this account from Social Security, portfolio distributions, etc.
5. Lastly, deposit the remainder of your retirement income into the 2^nd “variable checking” account.
6. Important: DO NOT take any funds out of the fixed account (other than the autopay items). This is a “set it and forget it” strategy that should be 100% automated. Once this is established, simply do a 1-time spot check either once per month, or once per quarter.

This effectively automates the budget and allows you to spend freely from the variable account since all “important items” (fixed expenses) are already automated / taken care of.

Here is a video that expands more on this: https://ewa-llc.com/videos/what-is-your-money-temperature/

Crafting a retirement budget is not merely about crunching numbers; it’s about sculpting a future that is both financially secure and personally fulfilling. Individuals can help pave the way to retirement by recognizing the importance of a comprehensive budget, harnessing the benefits of automation, and re-evaluating the traditional income theory.