The Essential Steps to Creating Your Retirement Budget

Welcome to part three of the retirement 101 series. If you've missed parts one and two, be sure to go back and listen to those as they each build on top of one another. And these episodes are also walking you through my retirement readiness checklist. If you have not downloaded that yet, be sure to grab that so you have it written out. spelled out, but these episodes are guiding you through with specific steps and examples to implement. If you're looking for further steps and details and strategies, join my retirement vault. It's a private podcast where we're diving in deeper into the strategies of implementing each of these series that I have been sharing, but it's also a place where you can come and ask your questions and get them answered on your own podcast episodes. I hope you'll join us over there. Back to the series, part one, we covered tracking expenses, which really you need to build awareness, building an emergency fund, which is your sinking funds and your savings goals, and that you are contributing to retirement savings consistently. Those are three key elements in a very comprehensive Solid foundation financially. Go listen to that one. In part two, we talked about how to manage your debt, how that's going to look in retirement and really building that understanding before you get there. We talked about risk tolerance and how to assess that, meaning are you aggressive, are you conservative and go listen to that for more, but it's also, we talked about creating a positive relationship with your finances. In part three, we're going to dive into what you should be doing as you're approaching the two to three years away from retirement. Now you can do this at any stage, honestly. It was, it just is a little bit better or more realistic, I guess with the numbers, the closer you are. But it doesn't mean that you can't create this. If you're five, you know, eight years away. We're getting into the numbers today, creating a estimated retirement budget. That's what we're talking about. This is how you know, when. When and if you are working with a financial advisor, when they ask how much do I need to live on every year that is what they ask. They're really good at that. And most clients don't know. And so I think financial advisors have kind of leaned into, well, you need about 70 to 80 percent of what you make. And I think it's just because there's this gap. I'm hoping to explain how to answer this question so it's not a gap for you. And if you are not working with a financial advisor, that is fine. You still need to know this number. We're going to walk through these steps to solidify what budgeting will look like in retirement. If you haven't learned how to do it now, it is something you really need to learn because it doesn't go away into retirement. Really being able to budget and have control over your money is something that is a lifelong skill and something that just makes everything easier. What are you going to do? Well, if you have listened to part one and you successfully have a budget, you know what that looks like, give or take. Then what I want you to do is I want you to look at your current budget and there are three things we're going to ask our questions about as we reflect on what's in the budget. First you're going to look at your expenses and you're going to say what stays. Meaning what stays. What bills, what expenses, what things you have are not going to change just because you're headed into retirement. Most likely this is your utilities property taxes, if you still have a mortgage that you're paying that would also stay, none of that's going to change so reflect through what you've got and what is not going to change just because you are no longer going to work or. You're only going to go to work part time. We're going to talk about that in the next episode. Really get clear on what is, you know, what is static? What is still going to be there? The second thing you're going to look at is what expenses are going to go away or be reduced in cost because of you not going to that job or not going to work anymore. If you are still traveling to work, is your fuel going to decrease? Are you still going to travel as much? You know, that's that's one big thing. If you're working remotely already, that probably would not change. It just, it's If you are working a job that has specific, you know, uniform, clothing, that type of thing, and you are not going to be dressing like that every day in retirement, your clothing budget is going to go down. There's a lot of things that just naturally reduce. So that is really important to reflect on. It will be hard to determine, but you can guess. You can guess if you are aware of your expenses now. My fuel, yes, dropped. I didn't know how much it would drop. I was still making travel trips To see my daughter every one or two months as it was, you know, five hours away. I needed to have that in there. I just didn't know what the other impact would be. I reduced it slightly. And then I found out nine months later, after actually putting it into place, that it was a lot more than that. That's how budgeting works. So, you've asked what stayed, you've asked what is going or reducing, and now it's time to think, what is going to be added? Because of this step, you know, because of retirement, what new expenses are now on your plate? This is going to be More than likely for everybody, medical premium of some sort, whether you're of age to get Medicare or not, even if you do. Medicare still has an expense associated with that. If you missed the episode with David Kerlin answering all the questions about Medicare, be sure to go listen in. But it is definitely an expense you're going to need to plan for. Medicare is not free. Medicare is just a means. It's based off of income. And you've got to be prepared for what that addition looks like. There may be some other things that you're That your business or your company was covering for you giving you as a perk, a bonus, whatever that may look like. And now you've got to. make up for that on the flip side. Think about those things. That is all of your expenses. That really helps you get to that number that the financial advisors are asking. How much will it take for you to live on? Every single year. That's I think typically how it's phrased. Something like that. And again, clients don't know, they're not sure, and so they've linked into that other. But this will give you that answer, if you filled this out, and you feel really good about your estimates, you're, you're happy. It's not going to be exact. It never is right. It's just great to have a plan. You're going to have that total for the month. Before we do anything more with that, I just want to talk about estimating your income. If you have other income sources, Besides retirement accounts or investments, such as rental income, another form of passive income or a pension, You're going to want to make sure you note what that amount is going to be. That's going to play a part in the next calculation we do. Knowing what that looks like. Yes, Social Security will be here if you're retiring before Social Security age or you want to max out at the age 70. Obviously, that's not going to be a part of it at this point. That just comes down the road. Make sure you estimate your retirement income with the exception of those just withdrawing from retirement accounts. So how do we use this information? And the next, there's two next steps. The first one is you're going to want to define your retirement savings gap. Now as I say this, and before I tell you how to calculate and then what to do, I want you to be prepared for this as just information. That's why the sooner you do this, the better off you are in making some adjustments. But this is going to say your amount. roughly, again, it's just an estimate of what you need to be able to retire. Now, there's still some things we haven't covered that we will cover in part four that could, you know, support this differently, but in a sense, this will give you the amount you need to live the way you are now. Okay. You've got that retirement budget. That is a monthly amount. Take that amount, times it by 12. This is your annual expense. That's the number we're giving to our financial advisor. Next you're going to take that number and multiply it by 25. This is just a formula that kind of gives you a gist of how much you need saved. 1. 3, 1. 5, maybe it's closer to 2. This is giving you that number. Now those of you that had income in the part we just talked about estimating. You're going to want to subtract that income amount from your monthly amount and then do the multiplication after that. Make sure you're adjusting for pensions and other income sources before you determine how much savings you need. Now, again, this number is just information. If you are three years away from retirement, there's still a lot of work that can be done. You're still consistently saving to retirement. That was in part one. That was in that fall, that foundational piece, making sure that is, if you skipped that, you've got to go back to that, that has to happen. And that is still going to go, even when we retire, our investments are still going to grow. Now, I know currently they're on a roller coaster, as I am watching it too. And I saw somebody say, I am losing all of my value. I need to move it into a CD or a bond, I don't lose all that value. Well, sir, I'm pretty sure it was a man. It could have been a woman. You are not losing all of your value. You're dropping from the initial high that you had, and it'll eventually come back. I am still well above. What I had when I left less than three years ago, there is one account I'm watching. I am really just wanting it to ride the roller coaster high. We almost got to the number I wanted before I was going to take out a certain amount and now I'm back low, but I am not anywhere near what I was two and a half years ago. Please don't get in that mindset as you're watching this day to day. Do not make decisions based off the day to day. I want you to go look at it historically and then make your decision. But just know that is going to continue to grow. It's very important to not move into that scarcity mode, whether it's from calculating that number, whether it's from looking at your values going up and down, everybody's is going up and down. Ride the wave, take control of what you can, which is your expenses, your joy, your happiness right now, and don't make that big decision just because it's going down. Okay. It's gone up for a lot of years. It's gone down for a lot of years. And over time it will end up higher than you were. Please don't panic. Please don't panic. So you've created the estimated retirement budget. You've defined your retirement savings gap. You've built your solid financial foundation from part one, and what you're going to do is, if you're like, okay, it's not too big of a gap, I need to start making some adjustments. Here are a few things that you can do. I want you to audit your current expenses. I want you to look at every expense, and number one, determine if it aligns with your goal. Your goal right now is retirement, or your values. Hopefully we've created that relationship with spending that relationship with our money that we know if that expense is part of what we value that we're not just spending to spend. That is really crucial at this point. Again, don't go into scarcity mode. Don't go into restrictive mode. That is only a recipe for disaster. Really just think if it aligns with your goals and your values. Take some time. Really get to know what your expenses are, if you have not already done so. Another way to look at it, if you're like, okay, but I really need to make some changes, even if it is just momentarily, to, you know, kind of close this gap more quickly. We need to simplify spending. I've had you audit them, you've reflected on them, there may have some that have come up, and you're like, well, I'm not sure, Is it supportive of my goal or my value? But I want you to use strategies. Again, not just, not just getting rid of spending. Use strategies like pausing and reducing. If you're five years away from retirement doing this exercise, Think about what you can pause to start increasing that savings. You can also do this at the two to three year mark, just to increase it. You're only going to pause it or reduce it for a little about, you know, a little amount of time. So say you have paused, I don't know, a service of some sort, you know, it's a luxury for you. You really enjoy it, but you figure, you know what? I can do this better. I've had clients say that to me. I canceled this bill and this bill because I can do it in a better way. That's the creative minds. That's the, I can do something different, but still have it. But if you pause something, say, and you're going to want to say when you pause it, I am pausing this for three months to see what it does or six months. If at that time that you reach the pause deadline, did you miss it? Is it essential? Was it something, yeah, that you missed? And if it's not, that's when you go into elimination or that's when you're like, you know what? I can keep going. I can keep going. The goal here though, is not just a cutback spending. We need to make sure we are directing that money first to retirement savings. Or if you have not done yet, And if you desire so to reduce your debt now going back to that estimated retirement budget, if you have a debt in there, let's say you still have your mortgage in there. If you paid that off, how much less would you need every single month netting every single year to now calculate a new number for you? That is why I stress debt is a dollar for dollar, but we still need to continue to save. The savings portion in an investment account, building the foundation with your high yield savings account, covering those emergency funds, covering those sinking funds and those savings goals that you need, that you want. Everything else should be in an investment account somewhere. That is the way to beat inflation for years to come. that will support you, I promise. Really lean into that. I know we've covered a lot, this is the numbers go back and listen if you need but hopefully this will help direct you into creating what that retirement budget will look like. Taking your current to your retirement future, which we're going to add some things next week, so be sure to tune in. And start segueing that way. Make sure you're starting to focus on what that's going to look like and how it's going to be supportive. Again, download the checklist that gives you the information. If you want to dive in deeper to some of these strategies, please jump into the retirement vault, the private podcast. If you have questions, definitely send them there or send them to me. There's links down in the show notes as I'm doing a question and answer episode. Hopefully in either March or April, if I get enough. So please, please, please send that my way. And we look forward to supporting you and helping you have a wonderful day.