Created: April 4, 2022
Modified: August 23, 2022

Budgeting During Retirement

Today we’re talking about budgeting during retirement. I don’t like budgets, or for somebody to tell me whether or not I can buy a cup of coffee or spend money on a movie or something like that. But it’s important to know where your money’s going and for you to have a secure retirement, for you to make sure you don’t outlive your money. Especially if you save just enough for retirement. Some of you have much more money than you need, others you haven’t quite saved enough. But if you’re right on that edge where you’ve absolutely saved enough, or maybe you’ve saved a little bit less than you need to, make sure in retirement that you have a handle on your budget.

It doesn’t take a lot to trim 3% to 5% of expenses, and by doing that you might get a lot more done as far as the things that you want to do in retirement. By just cutting out the things that maybe aren’t as important to you. So, let’s talk a little bit about budgeting and what budgeting is all about. Budgeting is quite simply knowing your money, where your money goes, so that you have confidence in your financial future. It’s about having some discipline. It’s about making sure that you’re not living above your means that you’re not continuing to borrow money or have yourself right on the edge. We talk about the stock market a lot on these videos, and it’s real important when the market goes down that you don’t have to sell at a low. And if you’re living right at your means, or a little bit below your means, if you’ve got more money than you need, more income than you actually need, it helps you ride out those tough times.

Setting budget priorities

What do we mean when we say with a budget, when we say we’re working with a budget? Well, the first thing I want you to talk about, and this isn’t so much budgets, but I want you to talk, if you have a partner, or think about what is important to you. What is really, important because a budget is about setting priorities. You’ve got to decide what’s most important to you. Maybe what’s the most important thing to you is being able to travel. Well, if you don’t want to cut back on travel, then maybe you want to cut back on where you live. Maybe you want to downsize a little bit. Maybe you want to make some changes in the cars you drive. Figuring out what’s important and what’s the most important for you, it’ll help you make adjustments in that budget.

 Also, is family important? Are taxes important? Can you reduce taxes? You’ve got to come up with this priority. And I know there are probably 20 to 25 different pieces of your budget but think of the top three. When you think of the top three that are most important to you and you shape your budget, you shape your financial life around those things, sometimes those other things take care of themselves. We talked a little bit about what’s important to you, now let’s get to fixed versus variable expenses. So fixed expenses are things like rent, or insurance. They’re the same expenses every single month. My house taxes are due twice a year. You could pay that over a period of time, maybe every month, or you could pay them once when they come up. For us, it’s January and it’s July, which it is for most people. You want to average those things in. I would still consider those things a fixed expense.

Variable vs. fixed expenses

Variable expenses could be two things, could be two types of expenses. One is expenses just come up from time to time. Others could be expenses that I have control over. I can get rid of or not. And so again, variable expenses, they might be things like gas, gasoline. They might be things like travel, things that I have a little bit more control over. You want to make sure that your budget has these two categories in it because variable expenses, again, we may be able to manipulate those. Fixed expenses, hey, you’ve got to pay your mortgage. You’ve got to pay your rent. You’ve got to pay your taxes. You have to buy groceries. Those are expenses that are always going to be there.

Establishing retirement income sources

Now here’s the great news: in retirement you get to decide, and you have a lot more control over, your income. Remember, while you were working, if you worked for someone else and didn’t own your business, you have what we call W2 income. Most people have W2 income. What that means is that you were getting a paycheck and your employer withheld portions of your paycheck for state and federal taxes, for FICA, and probably for health insurance. You were probably putting money into your 401k, but you didn’t have a lot of control over how your money got taxed. You had one income source. In retirement, many times you have several different income sources. You might have a pension, 401(k), or social security. You have control over when you turn those things on, so if you haven’t turned on social security or haven’t turned on your pension yet, put some thought into the timing of that.

Don’t just take some off-the-shelf-cookie-cutter advice

Everybody is different. You probably have other savings that are not in a qualified retirement plan. Maybe it’s in a brokerage account, maybe it’s in a bank. You have a number of different income sources, and when you create your budget, you want to have these income sources be part of the budget. Don’t just create the expense side of the budget, make sure you also create the income sources that are going to feed those expenses. Depending on the order of spending that you do, as far as the different income sources, you might save money in taxes. For instance, I can decide whether to trigger social security and leave a 401k alone. I can also decide to trigger that 401k and leave my social security alone. So that’s an example of different income sources, and that might affect the amount of money after taxes that I have to spend.

Debt in retirement

Get rid of debt. Get rid of all debt except for a mortgage, and we’ll talk about a mortgage in just a minute. If you can be debt free in retirement, you will be much better off to weather the storms that will inevitably come. Whether it’s health problems, or a family emergency, you’ll be able to weather those storms that will inevitably come along if you make sure you don’t have debt.

Now, remember I said mortgage a minute ago. I don’t mind if you have a mortgage in retirement. My mom and dad retired, and they had drilled into their minds, “Don’t owe anybody anything,” so they worked really hard to pay off their mortgage. I’m fortunate to have paid off my mortgage, but if you have a mortgage in retirement, it’s not the worst thing in the world. In fact, it might be a good thing because the money you could have paid off the mortgage with, you now have control over. A mortgage on a home is an appreciating asset. Most homes don’t go down in value over time. Most homes go up in value, so I don’t mind if you have a mortgage in retirement. If you’re itemizing your deductions on your taxes, you actually get a deduction for that interest that you’re paying.

Budget for unexpected expenses

You’ve got to have an emergency account. Remember the successful investor doesn’t get forced to sell at the wrong time. Yes, I know there’s hedge funds and professional investors out there, but you’re not them and I’m not them. Okay. We are ourselves, and we want to make sure we can weather the storm. The way you weather the storm is having an emergency fund, having money set aside so that you don’t have to liquidate different income sources like 401ks and so on before you want to. So make sure you’ve got a reserve account for unexpected expenses. And unfortunately, in this day and age, one of those unexpected expenses is healthcare. Health insurance, but I’m not talking so much about health insurance, I’m talking about medical expenses that can come up with regards to healthcare. Emergency healthcare, things that your insurance does not cover. And so it’s important. Again, we cover these things. There was a Fidelity study a little while back, and it said that the average family will spend $300,000 on healthcare in retirement.

That’s not just insurance. That’s the things that insurance does not cover. Now, if you are to the point where you just can’t have that reserve account, you can’t put aside six figures in a health reserve account, that’s okay. At least have enough money where you can cover about six months of your income, and that way when the furnace breaks, when there’s an emergency that comes up, maybe with a family, maybe you’ve got a car repair, you don’t have to hit the credit cards to pay for those things. So have a reserve account if at all possible. And then charity of course should be a part of a budget. If you consistently give money to charity, or you want to make that commitment, work it into your budget, and maybe you set it up so that’s automatic every month. So again, the key to budgeting in retirement is having a good handle on where you’re spending money and then having it be consistent every single month.

So what have we talked about so far?

We talked about fixed versus variable expenses. We’ve talked about income sources that you have, and it’s really key that you make sure you strategize over where you’re going to take your income from, in the different accounts that you have, to be able to take retirement income from, because it could mean a lot when it comes to your taxes. It could mean a lot when it makes sure that you are not going to run out of money before you die. Debt, get rid of all debt. Really simple. So budget to accelerate those debt payments as much as possible. Mortgage, it’s okay if you have a mortgage in retirement, it’s not a big deal because you owe debt on an asset that is appreciating, or at least holding its value for the most part. And I say for the most part, because I know there’s some houses that have gone down in value in the short term, but for the most part, real estate goes up over the long term.

I don’t mind if you have a mortgage. Have some money set aside for emergency expenses. And of course, try to make that charitable giving consistent. I’m a big believer in charitable giving. You know, we have problems in society that can be solved by the government, or they can be solved by private charity. I think they’re, most of the time, solved a lot better by private charity, but those private charities have to have money.

Senior discounts

I remember the first time I got a piece of mail that said, “Congratulations, you can join AARP.” It was a little depressing. Now they’re getting, they’re sending those things out at age 50. Of course, we get the magazine every month now that I’m 60 years old, but there are a lot of senior discounts available. So, just check. Just check to see if senior discounts are available.

Now I’ll tell a little story here. Don’t let this get around, but my father-in-law was trying to get senior discounts when he is 45. He always looked older. So he’d always ask for the senior discount, and of course he was kind of an intimidating figure, so the person behind the counter would never ask to see his ID. Don’t do what he’s doing. But if you’re retired, you probably are eligible for a senior discount, so make sure you’re getting those things. Denny’s what do I mean by Denny’s? You know, the restaurant Denny’s. Be careful. If you’re on the road in Florida, and it’s about 4:30 or so, you can get run over or get in an accident because everybody is rushing to the Denny’s for the early bird special. You might want to take advantage of that. It might save you some money in eating out.

In conclusion…

I would say start with what is important to you. What are the top three things that you can start with? Because a lot of times in budgeting, it’s a matter of give and take. Sometimes you got to throw some of those expenses off that budget sheet, not spend money on those things for a little while. It’ll be a lot easier here to do that when you know what’s important. Once again, subscribe to this video series. Click on the little bell so that you make sure that you get notified every time we upload a new video.

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