If you think the word “budget” sounds like a four-letter word, you aren’t alone.
Yet no one needs a budget more than an adult approaching retirement age. By the time you hit that milestone, you may be facing health struggles or you may not want to work full time, but you’re still likely to need financial resources to take care of yourself for years to come.
That doesn’t mean you need to cut out all the fun stuff. In fact, a budget isn’t about depriving yourself; it’s about preserving your assets as long as necessary. Changing your perspective is the first step toward creating a successful, enjoyable retirement.
Creating a budget is simple. Start with your income and subtract your expenses. If you have more income than expenses, you’re all set. If not, you may have some prioritizing to do. Let’s get started.
Determine your Income
Income can come from a number of sources, including RRSPs, TFSAs and any other savings, such as the sale of a business or a property.
Figure out the total. Then determine how much you can afford to spend annually by dividing this amount by the number of years you expect to live. With increasing longevity, this may be the trickiest part of the calculation. It may be worth considering how long your parents lived or your health history, but this number will be an educated guess at best.
Divide that annual number by 12 to determine a monthly amount. Then add in monthly payouts, including company pension plans, CPP or QPP and government programs, such as Old Age Security and Guaranteed Income Supplement. This is your monthly income.
Determine your Expenses
Expenses are simple to determine as well. They include:
- Essentials, including housing, transportation, healthcare, food;
- Discretionary spending, including entertainment, travel, gym memberships, charitable donations;
- One-time expenses, such as a child’s wedding or an emergency; and
- Taxes, including income tax and property tax.
Combine these numbers all together to determine a monthly list of expenses. Don’t skimp on this step, as it will set the tone for your retirement years. Include as much discretionary spending as you have spent over the last several years. It’s a good idea to allow for inflation as well, which is roughly 2-4% annually.
Make the Tough Decisions
If your income exceeds your list of expenses, you’re all set. No need to worry! You likely have enough for your retirement and you can continue with the lifestyle you are already enjoying.
If you’re like many people, however, the picture is a bit muddier. You may need to consider cutting back on some optional expenses or downsizing to a smaller home or a less expensive area in order to stretch your money farther. You may choose to continue working, whether it’s continuing in your current job or finding a part-time job.
There isn’t a single right answer. Each person must make the choice that’s right for them. The trick is to set up a plan and stick with it. If you retire under a certain set of assumptions and then you change the plan, your money may not last as long as you need it to. Some people try out their plan while they are still working to be sure it is reasonable. Either way, be sure to consult with your advisor before making any major changes.