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Staying on track with your retirement budget

September 9, 2019

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Staying on track with your retirement budget

Planning & Advice

This post was written by our friend Marie at The Boomer Club.

The day after your retirement party, you’ll be looking at the amount of your retirement savings that you’ve spent decades accumulating. Many new retirees have one of two thoughts about that lump sum:

  • Wow, that’s a lot of money. I’ll really enjoy spending it on all the things I’ve wanted to buy and do. Or,
  • That’s all I have to live on for the rest of my life. What if it’s not enough?

To avoid both of these extreme ways of thinking and to manage your money wisely in terms of spending now and having enough for the future, you need to have a budget, or what financial planners like to call a spending plan.

Set a budget  

A budget is essential when it comes to staying on track with your finances. Use an online budgeting tool such as Mint, or create a spreadsheet that you can share with your spouse if you’re married.

Keep in mind that budgeting in retirement is ultimately limited by your income from pensions and investments, as well as any draw-downs you plan to make from savings and investments. This needs to be carefully managed to ensure those accounts don’t run out of money. 

Once your fixed expenses are laid out, it’s up to you to decide how much detail you want to include in your discretionary spending. Some people like to set a spending allowance for the week or month in multiple categories and track each new purchase. 

I tend to be a bit more loose in my discretionary spending. I don’t set particular amounts in various categories. As long as I don’t exceed my monthly limit, I’m good to go. 

Here’s an example. Trish plans out each area of spending and manages her budget by “compartmentalizing” her thinking about money:

“I have different pools of money for different things like weekly expenses, a travel fund, a house fund, and so on. I can borrow from one or another fund if I need to, but my philosophy is that once the money in a “pot” is gone, I wait until the next month to move on. This gives me a mental picture of just where I stand and what I can afford.”

While most people know what their fixed expenses are, it’s easy to lose track of variable expenses. Without a budget, money tends to disappear.

Average retiree spending

According to a 2015 BMO Wealth Management Study, retired Canadians are spending $2,400 a month (adjusting for inflation that comes to about $2,575 in 2019). 

More than a third of that amount is spent on discretionary items. Other research has found that spending on having fun (cultural pursuits, entertainment, restaurants, alcohol and hotels) is vastly outstripping spending on essentials. 

However, 25% in the BMO study said they were spending a lot less money than expected. Are they depriving themselves of the fun stuff? Not necessarily. 

Mary tracks her spending in a spreadsheet and is finding it hard to spend all her money. 

“I’ve earmarked that money for a safari as well as a month in Paris.”

Can you afford it?

If we let our emotional mind (“I need it”) take over our rational mind (“I can’t afford it”), we may move more items from luxury to basic needs as we rationalize our spending. 

When you’re no longer working 40 hours a week, all of a sudden you have those hours available to spend money. Having a few beers after your round of golf, shopping the antique stores for entertainment, buying tickets to a concert or two, eating out more often – it all adds up. There is lots of free time to fill by going to places and doing things, wining and dining along the way. 

A new car becomes a “must have,” we want to modernize our kitchen for easy entertaining, an all-inclusive vacation is no longer just nice to have – and that’s how we end up spending more than we should.

Don wants to buy a sailboat priced at $49,900. He has the money to pay for it in his savings, but can he really afford it? He needs to see how that large of a purchase will impact his retirement savings in the future. In addition, he hasn’t taken into account all the ongoing expenses that will have to be factored into his budget – insurance, moorage, maintenance, fuel, etc. 

Around 21% in the BMO survey said that they were spending more money than anticipated. 

And don’t forget, the more we spend, the more we have to withdraw from our investment portfolio, and the higher our income tax will be. 

But, include some splurges

When you prepare your budget, don’t limit yourself to just your basic necessities. The secret of staying on budget is to include the occasional splurge – those special treats – without wrecking the rest of your finances. 

Let’s face it. You love nice things. Don’t banish them from your life. The key to splurging is that it should be purposeful and give you pleasure, rather than being a mindless habit. What you splurge on is going to be as unique as you are. Take some time to figure out what really brings you those blissful surges of happiness. 

The bottom line

Make a conscious decision about how much you are spending today versus how much you will need for the future when spending patterns might change. You have control over how much you spend and that can impact your bottom line during retirement more powerfully than all the things you can’t control. 

It’s important to review your personal budget regularly and make adjustments where necessary before things get out of hand. 

The alternative to drafting a budget, reviewing it, and adjusting as necessary to account for life changes is something called a hope and a prayer. 

This alternative is not recommended by nine out of ten financial planners.

The Boomer Club is a blog by Marie Engen sharing ideas about retirement, finances, health, family and living well.

Disclaimer: This blog post is provided for informational purposes only and is not to be considered as investment advice. 

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