How to Create a Retirement Budget Before You Retire

Before retiring, it is wise to create a retirement budget in order to determine how much of your income should cover expenses.

Review your bills and bank statements carefully and identify expenses likely to recur, such as food, clothing, transportation and home care costs. It is also crucial that you calculate expected healthcare expenses.

Expenses

As your first step toward retirement planning, it is essential that you first assess the expenses you anticipate incurring in your golden years. Start with your current monthly take-home pay after deductions such as taxes and retirement plans have been taken out.

Add up all recurring costs that will continue in retirement, such as utilities, insurance premiums and maintenance expenses. Also include nonrecurring expenses such as travel or charitable giving.

Some expenses may decrease with retirement, such as transportation or clothing costs; while other expenses may rise significantly. Healthcare costs, in particular, tend to go up over time and you may need additional retirement-age housing; property taxes also need to be taken into consideration if you own your own home. Next step should be identifying how much savings is necessary in order to meet retirement income needs - experts often suggest saving up to 80% of current income as savings goals.

Income

Establish your sources of retirement income, such as Social Security benefits and distributions from tax-deferred accounts such as IRAs. Determine if you have enough retirement savings to cover anticipated expenses such as medical bills and housing costs in retirement.

Review past bills and online bank statements to establish an average of the money coming in each month as opposed to what goes out; using this data you can estimate the typical monthly spending in retirement.

Consider including extra expenses such as annual property taxes or insurance premiums in your budget, and establish an emergency fund for special occasions or major purchases like buying a car.

Taxes

As you begin planning for retirement, it's essential to take tax considerations into account. With working life out of the way, chances are your tax burden should diminish when retired compared to before.

Consider all possible sources of income, from Social Security and pensions, withdrawals from tax-deferred accounts such as 401(k)s and traditional IRAs and dividends and capital gains from nonretirement investments - by diversifying these sources, you could possibly avoid high tax states altogether.

One way of estimating potential future taxes is the "income replacement rate." This figure estimates how much preretirement income, before taxes, you will require in retirement in order to live similarly to how you currently do. Keep in mind this estimate can only provide a rough idea as every individual's expenses during retirement will differ significantly.

Investments

As you transition towards retirement or already enjoy retired life, comparing expenses against sources of income can give an idea of your savings security. When creating a budget it is also helpful to think ahead to savings goals as returns on investments may change over time.

Make use of a retirement income calculator to assess how much money will be needed during retirement. Include all sources of income such as pensions and Social Security payments along with nonportfolio assets like real estate or proceeds from selling a business.

Be sure to account for inflation when comparing spending to income. Over time, inflation can erode the purchasing power of your savings and threaten your retirement income if not properly considered.

Savings

As you approach retirement, take the time to assess whether your savings will cover all your anticipated expenses in retirement. Doing this is crucial so as not to deplete your savings prematurely. If your expenses exceed income during retirement, consider working longer or making lifestyle adjustments such as moving into a cheaper house or roommate sharing arrangements.

Consider whether some expenses, like health care, will increase in retirement; balance these increases against costs that will likely decline once your mortgage has been paid off; nonrecurring expenses like gifts or charitable giving should also be taken into account; then take your estimated annual expenses in retirement and multiply by 25 to determine an achievable savings goal.

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