INCOME PRESERVATION SECRETS – VOLUME 2
Special Retirement Planning Bulletin
Four Steps to Creating a Postretirement Budget
Many seniors believe that once they’ve reached retirement, they no longer have to worry about creating a budget. But a budget is even more important when you’re on a fixed income than it was while you were working.
Don’t let the process of making a budget intimidate you. Instead, start simple with this four-step budgeting guide.
Step One: Add Up Monthly Expenses
By the time you reach retirement, your bills or expenses should look significantly different than they did while you were working. Ideally, all your debt will be paid off but you’ll still have to pay for utilities, groceries, insurance and entertainment. Use your past six months of bank statements to get an accurate picture of what you’re really spending each month.
Step Two: Add Up Monthly Income
You may have several sources of income after retirement, some fixed and predictable (such as annuity income and Social Security) while others are variable and on-demand (such as an IRA distribution). For this exercise, add up only your fixed sources of income, since that’s what you want to limit your monthly spending to.
Step Three: Subtract Expenses from Income
Take the number you got for your expenses and subtract it from your income. If your expenses are greater than your income, the difference is the amount you have to take from your savings each month in order to supplement your income. If your expenses are less than your income, the difference is what you can set aside for emergencies, vacations or future needs.
Step Four: Adjust Your Spending
Now it’s time to start making adjustments to your spending. The goal is to limit yourself to spending only your fixed income so you don’t deplete the rest of your savings. If your monthly expenses are equal to or less than your fixed income, you don’t have to make any adjustment. If, however, you’re spending more than your income brings in, you need to look at your discretionary purchases and make cuts. Things like entertainment and dinners out will be some of the first expenses to go.
Remember, a budget doesn’t have to be fancy or complicated in order to be effective. It simply must ensure you spend less than your income.
In the next volume of the INCOME PRESERVATION SECRETS series, I’m going to give you some tips to help you get the most from your Social Security payments. Social Security is one of the most important fixed income sources during retirement, so understanding how to maximize it is vital to ensuring your postretirement comfort and security.