After the last couple of years we’ve had, you are likely more eager to retire now than ever before! During this tumultuous time, you have continued working, day in and day out, just as you have for decades. Often what keeps you going is the knowledge that one day you’ll finally pack up your office (or home office) for good. But rather than eagerly anticipating the golden years of retirement, almost half of all Americans worry about running out of the money they’ve worked so hard to build for so long. (1) Even if this worry isn’t currently keeping you up at night, you may feel the need to be fiscally responsible in retirement in order to avoid problems down the road.
If you want to stay on top of your finances in retirement, a budget is essential—in fact, it’s the foundation of personal financial management. In this article, we will discuss three budgeting tips to help boost your confidence and provide a sense of comfort as you enter and enjoy retirement.
1. Identify Flexible Spending Categories
As you build your budget, organize it based on needs. Every single expense should be identified as either fixed or variable and essential or non-essential. For example, your housing expenses are likely fixed and essential. Food is essential, but it is a variable expense. A gym or country club membership may be fixed, but it is non-essential. Other forms of leisure or travel are likely variable and non-essential.
Knowing which expenses are necessary and which are flexible can relieve some of your concerns going into retirement. If you’re used to spending $8,000 a month, once you sort your expenses and discover that only $4,500 of them are truly necessary, it relieves a lot of pressure.
Identifying these spending categories also allows you to make wiser financial decisions and adjust better to market conditions. If we enter a bear market and your portfolio is down, you can cut spending back to cover the necessary expenses you identified. Maybe you put off that big trip or eat out less. This can potentially keep more of your money invested so you can be better positioned if and when the market bounces back.
2. Plan for Taxes
Unless all your money is in an after-tax account or Roth IRA, you’ll have to deal with taxes in retirement. Having your mortgage paid off before retirement is a common—and excellent—goal. However, don’t make the false assumption that no mortgage equals no payments.
Part of your monthly mortgage payment may be going toward property taxes and homeowners insurance if you escrow. Don’t forget that you still have to pay these bills when your home is fully paid off, and these figures must be included in your budget (and remember that these numbers will be inflating over time as well). One way to handle property taxes and homeowners insurance in retirement is to set aside money every month, just like you did with your mortgage. This way, you will have the funds available when those bills are due.
Property taxes won’t be the only taxes you’ll owe in retirement. Distributions from 401(k)s and IRA accounts will most likely be considered taxable income. Even your Social Security benefits may be taxable, depending on your overall income. It’s critical that you withhold and pay the proper taxes so you don’t get into a large tax bill situation. A competent tax preparer can help with this.
3. Work With a Professional
However, it’s not enough to only work with a tax preparer during retirement. Be sure to also work with a competent financial planner—it can mean the difference between a retirement marked by fear and stress (like the 49% of Americans mentioned previously) and one of confidence.
Yes, it’s wise to have a financial professional help you with your investments during this next stage of life—but don’t stop there. You need your professional to help manage not only your money but also your entire financial life.
Our team at Favor Wealth will help develop a comprehensive financial plan that includes your short-term and long-term goals, a sustainable budget, and a general road map to help you navigate retirement. To learn more about what it’s like to work with a professional who cares about your passions and dreams more than your investments and wealth, contact us at 626-529-0445 or email Ricky directly at firstname.lastname@example.org.
Ricky Biel is the founder, wealth manager, and Chartered Retirement Planning Counselor℠ professional at Favor Wealth, an independent financial advisory firm serving individuals and families near Pasadena, California. Ricky Biel founded Favor Wealth with a desire to provide unbiased, client-centered, community-based financial advice. Ricky and his team of caring, smart professionals want their clients to feel like they’ve done them a favor, making it easier than ever to accomplish their financial goals by blending proven investment methodologies with creative financial technologies. He is on a mission to help his family of clients feel both a sense of relief and excitement about their future. Favor Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the Favor Wealth team may be able to help, contact them today at 626-529-0445 or email Ricky directly at email@example.com.
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