Understanding what your expenses are going to be is a vital part of a successful retirement planning process. One of the biggest mistakes retirees make is spending too much in the early years of retirement. This puts a strain on incomes and assets in later years. Proper planning will provide critical guidance on how much income you need, today and in the future.
Budgeting is simply taking a look at the expenses you’ll have after you retire. People have a tendency to put off budgeting for fear of discovering where they spend their money. To begin a budget, you need to review your last twelve months of bank and credit card statements, then break down your expenses into two categories:
- Fixed Expenses
These are constant and ongoing, like mortgage, insurance, property taxes, car payments and food. Some, like groceries and utilities, will vary from month to month. By taking a look at the past twelve months, you can arrive at an average monthly cost.
- Variable Expenses
These are things like travel, entertainment and hobbies. It is important to understand what kind of retirement lifestyle you want to live. In retirement, variable expenses tend to increase. Try to picture how much traveling you plan to do or how much you’d like to spend on your hobby.
You also need to think about expenses that are going to change. Among the most common are healthcare, life insurance, long term care insurance, mortgage and taxes.