If you ever want to retire from work (and not everyone does) then you will need to do some budgeting for retirement. This will allow you to know how much your retirement will cost and therefore how much you need to have saved.
But what do you include in this budget? What does your retirement lifestyle look like? If you’re in your 30s, 40s or even 50s, how do you know how much things will cost in the future?
Even though your budgeting for retirement will involve a lot of guess work, it’s better to have a plan and an idea than not. A plan will motivate you, give you clear direction and a goal to aim for.
Here’s how to start budgeting for retirement.
Where to start when budgeting for retirement
A good place to start when thinking about what lifestyle you want in retirement is to decide whether you actually want any change to your lifestyle now.
Providing the mortgage is paid off and if you take work out of the equation, most clients we work with don’t want anything less than they have now.
So as you are already paying for the lifestyle you have now it’s quite easy to work out how much that costs.
List all of your regular direct debits and standing orders for things like Council Tax and utility bills. Work out how much you spend at supermarkets every month. Then look at car costs.
All of the above is essential spending that you are going to do for the rest of your life regardless of where you live and what other things you may spend your money on.
A couple of things to think about at this stage of your budgeting for retirement:
- You need to increase your budget by inflation each year. From 1989 to 2019 UK inflation has averaged at 2.56%, meaning prices for things tend to go up by 2.56% every year.
- If you currently have children still living with you, then budget your bills to reduce by the percentage of people leaving in your home in retirement. E.g. if there are 4 of you living in the property now and 2 children will be leaving before retirement, reduce your bills by 50%.
- If you plan to downsize your home in retirement, then reduce your bills by the percentage decrease in property value. E.g. if your current home is worth £500,000 and you would move to a home worth £300,000, reduce your bills by 40%.
So what we have dealt with here so far in your budgeting for retirement is all your core spending.
Before you can start budgeting for all of the fun stuff, the holidays, the hobbies, the evenings out and entertainment, there are a few other more ad-hoc expenses you may want to consider.
Extra things to think about when budgeting for retirement
- New cars – Whilst cars are becoming more reliable and therefore need replacing less often, it’s still a good idea to budget for a new car every 5 to 10 years if you are still keen to be driving. You could balance this against perhaps moving from 2 cars in a couple to 1 car.
- Upgrades – Especially when it comes to technology. Computers, tablets, phones etc will all need replacing every 3-5 years. The companies that make these products almost force you to do this by not allowing the latest operating systems to run on old devices.
- House maintenance – Nothing really lasts forever, so think new windows (every 20 years), new carpets (every 10 years), painting and decorating etc.
- Gifting to family – You may want to help your children out, perhaps see them onto the property ladder or send your grandchildren off to university. This type of budgeting in retirement can also be very beneficial to you from an Inheritance Tax point of view.
- Care fees – Some people like to put money aside for their potential care in the future. Putting money aside along with setting up a Lasting Power of Attorney can mean you have more choice over where you receive your care. If you are someone that is happy to rely on what the state provide then you can ignore this.
We deal with budgeting for retirement with our clients day in and day out and use sophisticated software that can project your cash flow and show you what your lifestyle may look like. We can even tell you the probability of your plan being a success!
We are currently putting together a webinar that goes through budgeting in retirement in more detail, including a demo of an example cash flow forecast. If you are interested in attending please register your interest below and we’ll be in touch.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.