Creating the Optimal Money Balance in Retirement

Creating the Optimal Money Balance in Retirement

August 08, 2022

Creating a good work-life balance has been a recent mantra to generate wellness during the working years. Often, during the working years, the “enjoy life” part can be pushed off with the anticipation that it will come when you finally hit your golden years and retire. Like magically, your life will transform into nothing but enjoyment. In reality, you still have to find that balance to pay the bills, possibly help family and friends, and ensure that you don't run out of money before you run out of life.    

Retirement income doesn't replenish the way that income from work did. Outside of social security and possible pension assets, the money you've invested in retirement will likely be spent down over time, making it critical to have a budget in retirement. Whether you are planning for retirement or already retired a spending plan is essential.

Must-Have Versus Want to Have

Retirement expenses are different than working expenses, and if you don’t give some thought to the changes in advance, overspending can creep up on you. A good budgeting approach is dividing your spending items into "need to have" and "nice to have." 

On the "need to have" front, the goal is to understand what you have to pay every month. These are those expenses that are going to be there no matter what and there’s really not a lot of room to cut them back if you are in a pinch.   Ideally, you’d like to get that number to a level that you can pay them with guaranteed stable income sources, like social security and a pension.     

  •  Healthcare and Wellness – It's common to think that spending will go down when Medicare kicks in, but it may not be accurate. Medicare supplemental premiums can be expensive and depending on your income; you may be subject to the IRMAA surcharge on Part B and Part D premiums. The costs of healthcare rise over time, and your need for healthcare will also increase. Long-term care insurance costs are part of this category. You should also include a "Wellness" category here for things that aren't covered by insurance but may be part of aging gracefully, like massage, physical therapy, acupuncture, gym membership, etc. 
  • Home Mortgage and Maintenance – The question of paying off a mortgage in retirement is specific to your situation. Some people do – and some people refinance. It's all about what works for you. But maintenance costs will likely increase because they do over time, and you may want to outsource things you used to do yourself as you age. You may also need to account for necessary renovations, and don't forget to build a budget to age-proof your home if you intend to stay there throughout retirement. 
  • Utilities – This doesn't just include power and light. Today's utility budget means cell phones, cable, and streaming services across content and music. 
  • Transportation – The cost of your vehicle loans, maintenance, insurance, and gas. If you have an older vehicle you own, will you replace it at some point?
  • Food – Depending on your lifestyle, food costs may remain the same. But if you've been waiting for retirement to indulge in elaborate cooking, taking classes, or even going on a diet that requires different food, give it some thought in your budget. 

The “nice to have” bucket is more flexible. What you choose to spend money on outside of essential and discretionary expenses related to you may become more important. A great way to fund these is to pare back spending on essentials and discretionary items and find ways to save so the "found" money can be redeployed to things that matter to you more. Identify the expenses that add to the comfort and joy of your life. The ideal income match for these expenses is income generated from investments. 

  • Travel – If your retirement life revolves around travel, this should be a monthly expense, and all your trips go into it, whether you travel every weekend or take several big trips a year. Create a separate vacation budget category. This will help you understand where you are spending money if you need to cut back. 
  • Entertainment – Whatever your lifestyle is, put a number to it. Dining out, having parties at home, social activities, and casual "fun" that you don't often do (ax throwing?) all go in this category.
  • Hobbies –  These expenses can be tricky as they tend to run across several categories. For example, if you are a golfer, you may have club fees, equipment costs, lessons, etc. It would help if you understood the entire picture of what the hobby costs you. 
  • Giving – Charitable giving can help you save on taxes, but it may also include more casual giving to family. Having the time and money to spoil grandkids is one of the joys of retirement but put a number on it and consider if it is jeopardizing your retirement goals.

Saving Money in Retirement is a Little Bit Different

Understanding both your “need to have’s” and “want to have’s” can help you allocate money so that you can both live for today while planning for the future. If one goal you have is not being met, budgeting may help you understand areas you can cut back in to help reach other aspirations.  

For example, may retirees downsize in retirement, potentially saving them money with lower taxes and maintenance costs. Perhaps it’s as simple as shopping around for items like your cell phone carrier, cable provider, or insurance companies. A spending plan, where you prioritize what is important, and make changes with your budget to free up money, can help you achieve more.

The Bottom Line

 The key to keeping budgeting from being associated with a four-letter word is to pair it with motivation. Instead of thinking about money resulting from behavior changes as savings, consider it as a tool showing you where it’s possible to spend.    

  •  Give up a couple of lunches out and put the money saved into a bank account earmarked for a charity or to sponsor a local scholarship or sports team.
  • Think about what you buy – do you need costly labels or the latest new thing? We're not suggesting you take up thrifting (although it's fun!) but cutting back on quantity and quality makes an impact. This can add up, and it's a great source of funds for education savings in a 529 plan.
  • Pare back your grocery bill and give the difference to a local food bank

Your life will change in retirement, so making sure your spending keeps pace with the new lifestyle you are creating can pay off. Looking carefully at all your expenses will likely increase your savings as you realize where your new priorities lie.   

This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website.  River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.