Take The Retirement Budget Test
Moving into the next phase of your life -- whether it's full retirement, a less stressful part-time job or an entirely new venture -- will be an exciting change. It's also a financially frightening one.
Don't leap with your eyes closed.
"It is the end of something we have known for many, many, years and it calls for re-creating ourselves to some degree,'' says Laura Barnett Lion, a certified financial planner based in Austin, Texas. "Recognizing that in advance can reduce the stress. Things that are expected are easier to handle.''
Prepare yourself for a successful switch to a new lifestyle by giving your Second Act budget a trial run. How can you know exactly what you'll spend when you change your lifestyle? You can't. But you can make an educated guess. If your guess is wrong, that's OK. That's what this trial run is all about. Stay flexible and open-minded and you can make your money help you reach your goal.
Start with the budget you use today. If you don't have a written budget, it's time to create one. Use this worksheet to get started. For the next two or three months, track all of your expenses -- even the little ones. Save receipts for every penny you spend and every dollar you invest. At the end of that period, categorize your expenses so you have a good idea of where your money is going.
The Spending Plan
Next, create your Second Act budget.
"With the existing budget as a template, you can review current categories and work through which will likely increase and which will decrease,'' says John Bird, a certified financial planner with Albion Financial Group in Salt Lake City, Utah. "You'll also need to brainstorm budget categories that do not currently exist but may exist in retirement."
Think you'll spend less? Think again.
Many pre-retirees mistakenly assume they'll need only 70 to 80 percent of their current income. Unless you plan to spend your days in a rocking chair, you're going to have more time to do things you never had time for before, and an active lifestyle costs money. (Think "I would golf every day if I didn't have to work'' or "I finally have time to visit all those museums and Broadway shows now.")
As you create your new spending plan, consider the following:
- Housing: Perhaps you're close to paying off your mortgage so you can eliminate that expense. Or maybe you plan to relocate or buy a second home, so your housing costs may rise.
- Transportation: Your gas or public transportation costs may dip if you're no longer commuting.
- Clothing: If you don't need to wear a suit every day, your clothing budget and dry cleaning costs may decline.
- Medical costs: If you're currently covered by an employer health-care plan, you'll need to replace that coverage. If you'll be eligible for Medicare, don't forget to investigate costs for supplemental health insurance, prescriptions and dental care.
- Employer-paid expenses: You may say goodbye to a free company car, cell phone or life insurance benefits.
- Food: If you're not working full-time, you may dine out more. Or perhaps you'll have more time to cook, so costs may go down.
- Entertainment: If your next life stage gives you more free time, it also means you have more time to spend money.
- Service costs: You may no longer need a housekeeper or gardener because you'll have more free time for those tasks.
- Travel: You may vacation more--take a spur-of-the-moment trip to Las Vegas or hop a plane to spend more time with your grandchildren.
- Savings plans: Retirement plan contributions are an expense item. If you're no longer saving, you can check that off your budget list.
Once you establish a rough budget, you'll know how much money you'll need to support your new lifestyle. Consider your resources:
- Part-time work: A part-time job may bring in extra income, but it could also mean extra costs. "Adding a part-time job may kick them into a higher marginal bracket and may cause a portion of their Social Security benefit to be subjected to income tax,'' says Bird. "The job may also add household costs that they otherwise would not have incurred, such as wardrobe and transportation.''
- Social Security: Visit the Social Security Administration's website to get an updated benefits estimate.
- Pension: If you're due a pension, ask questions about your different payout options.
- Investments: Consider meeting with a financial advisor to discuss strategies for withdrawing funds from your retirement and other savings accounts.
- Inheritances: Forget it. Don't include any estimated inheritances in your overall plan. There's no guarantee you'll get what you think is coming to you someday.
Take the Test, Then Test Again
Take your new budget out for a spin, and once again, keep detailed records.
At the end of a month or two, re-examine your budget and see where you stand. You might be surprised to see how much income you'll really need to support your new lifestyle. If the numbers don't work out, try again with some new strategies. Return to your budget and see if there are items you'd be willing to forgo in exchange for leaving your full-time job at an earlier age.
Lion notes that if you're close to your goal, you can make easy changes, such as going to the movies less often or cutting the restaurant bills. If you're way off the mark, she says, consider more dramatic shifts, such as downsizing to a less expensive home or having only one car.
If there are too many non-negotiable expenses, plan to stick with your current career for a few more years, and use those years to increase your savings.
"Plan for lots of buffer, more than you ever have,'' Lion says. "In the past, you had time to make up for mistakes and oversights. Now you don't.''