Your retirement day has arrived and it's time to celebrate! No more waking up at 5:30 AM, no more commuting, and no more need for budgeting. Well, the first two of those may well be true, but the last one - not so much.
Indeed, I would argue that effective and effective retirement budget takes on even greater importance. Planning for your retirement begins long before the day you retire, but once you do, budgeting is critical to your long-term financial health.
This is a reflection of a number of considerations.
What to Consider when Budgeting for Retirement
Your income will most likely be lower and, while some sources will be indexed (ex. Canada Pension Plan), others will not (ex. Retirement Income Funds). Being aware of all income sources in retirement and how they will operate is critical to assessing your ability to meet your expenses through your retirement.
You will read many articles stating that expenses decrease in retirement. After all, you will not have the same commuting costs, your clothing needs will likely decline, fewer lunches to buy, etc. While that all may be true, there are two aspects to consider that alters this picture: the types of expenses incurred and the opportunity to spend.
The Types of Expenses Incurred
In retirement, you may incur expenses that were either not present in your working years, or did not exist to the same extent as in retirement. Examples of such costs would include:
- health care
- long term care
- assistance to family members
For some of these areas, the costs could be considerable. Furthermore, while some of these costs may occur on a scheduled basis, others (ex. health care) may be of a more random nature.
The Opportunity to Spend
In our working years, the time we have available for discretionary spending is constrained not only by our employment, but also by family and other social responsibilities. In retirement, that could very well change. Presented with the opportunity to spend - would you? If your inclination is to spend, you need to ensure that you are building sufficient flex into your budget.
Apart from the "pencil, paper, and calculator" method of budget construction, there are a number of online tools available to help you. For example, the Financial Consumer Agency of Canada (FCAC) offers a budget calculator.
You are not alone when constructing your budget
Budgeting is the bedrock of the financial planning process and your Financial Planner can provide guidance and assistance along the way. This is one of the primary values of working with a financial planner: putting the structure in place to allow your goals to be realized.