Why Successful Retirement Budgeting Protects Your Golden Years

Retirement represents the reward for decades of hard work. It's a time to enjoy the freedom and experiences you've been looking forward to throughout your career. With thoughtful planning, you can create a financial foundation that supports the lifestyle you want while giving you peace of mind about the future. Since you've been diligent about saving for retirement, the key now is to develop a smart strategy to make those funds work effectively for you throughout your golden years.

Here are some tips to help you create a retirement budget and plan that lets you live comfortably, handle unexpected expenses with confidence, and truly enjoy this exciting chapter of your life.

Create a realistic — but flexible — retirement budget

When it comes to creating your retirement budget, don't think in terms of restriction. You've worked hard your whole life, and the last thing you want to do is spend your golden years limiting the hobbies and activities that bring you joy.

This doesn't mean you should spend with reckless abandon. But instead of focusing on restrictions, try to focus on being honest and clear about your needs. Start with your essential living expenses, then consider what other costs you'll have in retirement. If you've dreamed of long days on the golf course, budget for club memberships and equipment. If you want to spoil your grandkids, set aside money each month for family activities and gift-giving.

Leave room in your budget for any unexpected expenses. Still living in the home you bought early in your career? That old furnace will likely need replacing at some point. While no one enjoys dealing with surprises, they're simply part of life, so it's smart to plan for them.

Know all of your income streams

Once you know your budget, it's important to look over all of your income streams. The most ubiquitous income stream for all retirees is Social Security, but it's advisable to wait until age 70 to start collecting, as doing so allows you to maximize your benefits. Not only will you maximize what you receive each month, but it can increase the benefits your spouse will receive in the event of your passing. You should also familiarize yourself with any pensions you might receive, as those can vary in their rules depending on your profession and industry.

When it comes to your retirement accounts, such as your IRAs and 401(k), you need to plan strategically to ensure you receive the monthly income you'll need to live comfortably without spending the money too quickly. These accounts can vary in how they are taxed; some require you to shoulder the tax burden when you pay into them while taking withdrawals tax-free, while others require the very opposite.

Furthermore, some of these accounts can actually penalize you if you don't take a required minimum distribution (RMD) starting at age 73, which means that even if you don't necessarily need the money from that account for your budget, you should include it as part of your retirement income strategy.

There are a lot of moving parts when it comes to figuring out all of your various income streams in retirement, and no two retirees have an identical portfolio. On top of these retirement accounts, you might also have brokerage accounts or income from rental properties. If you feel overwhelmed, it's a good idea to talk to a financial advisor.

Factoring in the 4% rule

A rule of thumb that many retirees use to plan their income streams is the 4% rule. The 4% rule basically dictates that you can withdraw 4% of your retirement savings in your first year of retirement, then adjust that amount annually for inflation, with the goal of making your money last for a 30-year retirement period.

While this rule works as a good general guideline, it's not perfect for everyone's situation. For example, a recession could render the 4% figure largely irrelevant. Even if the economy remains relatively tame throughout your retirement, unexpected health care expenses or a large home repair could land you in a situation where you have little choice but to withdraw more than the 4%.

Always remember to budget for healthcare

One common mistake that people make in their retirement budgeting is to assume that Medicare or a health savings account (HSA) will cover all of their healthcare expenses in their senior years. While these sources of medical financing do indeed provide basic coverage, many seniors find themselves without the resources they need to cover unexpected procedures, or routine health needs like vision and dental.

When budgeting for retirement, always remember to factor in healthcare, including how you'd pay if you needed long-term care, which Medicare often doesn't cover. It can be hard to estimate how much you'll need on hand since you can't predict the future, but it's better to have too much money earmarked for healthcare costs than too little.

Don't treat retirement budgeting as a one-and-done

We often think of planning for retirement as a one-and-done experience. We retire from the working world, we set up our income streams, and then we lazily float down the river into the sunset. However, as you progress in retirement, you might find that the needs you thought you'd have aren't the needs you realistically experience in retirement. This can mean increasing or reducing your monthly income.

While it's nice to be done with having to crunch numbers, it’s still a good idea to periodically take time to reflect on your budget each year in retirement. Staying proactive about your retirement budget means you can rest easy knowing that your golden years are secure and that you are able to adapt to life's changes with confidence and peace of mind.