Planning your retirement budget
Wise retirement planning begins long before you give your boss two weeks’ notice about your last day on the job. It involves analyzing current expenses, anticipating future outlays and making sure you will have enough income to cover them all. But beware of certain expenses that may thwart your best-laid plans.
On a typical retirement budget work sheet, you’ll see lines for “miscellaneous” or “other” items, probably somewhere near the bottom. It’s easy to gloss over this section once you’ve assessed your income needs for such basics as housing and health care. But when you get down to the details of filling in the blanks, these add-ons can account for a significant portion of your retirement spending.
Consider these five situations that might put a strain on your retirement budget if you’re not prepared.
Taking up an expensive hobby
Say your retirement dream includes racing yachts, collecting antique dolls or starting a goat farm to make artisan cheese. Even if your only real passion is playing golf, your retirement plan should include a way to pay for it.
Harriet Veenker, a Certified Financial Planner in Aitkin, Minn., says it’s especially easy for spending on hobbies and recreation to get out of hand during the early retirement years.
“Most new retirees tend to overspend in their first year or two because there is so much out there to do,” Veenker says. “Some of the pension plans aren’t helpful, because they’ll let you take more out in the first five years — because that’s when you’re really busy.”
Veenker’s neighbor, a teacher in the Elk River, Minn., teachers’ pension program, elected to take bigger payouts at the onset of retirement. “It is a decision that she has regretted, since the income was cut back after five years,” says Veenker.
Make sure you have a spending plan that will fit your lifestyle and allow your retirement income to last for the long haul.
Upgrading your home
Consider how much room you’ll need in your retirement budget for home improvements –whether it’s renovating your kitchen or bath with universal-design features, putting a master suite on the first floor or replacing an old roof.
Melissa Motz, a Certified Financial Planner in Harleysville, Pa., finds that her clients often underestimate what they will spend on home improvements during retirement. But while they may insist they’re done with renovating, their plans often change later on.
“Just because you’re retired doesn’t mean you’re all of a sudden going to stop wanting things,” Motz says.
The one thing you shouldn’t count on, says Veenker, is taking on a major debt — like a home equity line of credit or second mortgage — to finance the upgrade. She says it’s better to think ahead about what needs are likely to come up and start saving for them now.
“If you’ve got a roof that’s going to last 25 years, you divide the cost of the roof by 25 and that tells you what amount you have to save per year to be ready for the next roof,” Veenker says.
Bailing out an adult child
Maybe your college kid has picked a major with dubious earning prospects, or you have an adult child who is already in financial trouble. If you know you could never resist a request for a helping hand, you’d better plan to have enough cash on hand to cover your generosity.
Motz says helping their adult children financially is probably the biggest budget squeeze on her clients who have entered retirement. Some who are still saving for retirement have put their future income at risk by helping their child purchase a home or pay for other expenses, she says.
“When I’m helping them plan, I ask them to look at their life now,” Motz says. “Who’s in their life? Who are they responsible for? Who do they feel they would want to help if something came up?”
Caring for a parent
If you expect to be involved in caring for a parent or in-law after you stop working, factor these potential costs into your retirement plan.
A serious illness might have the parent moving in with you or needing help to pay medical bills or for nursing home care. Or you might be pitching in to pay bills, buy groceries and take care of household maintenance for a parent who is struggling financially but wants to stay in their own home.
“Talk about things ahead of time,” Veenker says. “Make sure there is an overall awareness of what each person can do, and see if that matches up with what the parents think might work for them.”
This is also a good time to discuss with elderly parents what Veenker calls “the cornerstones of estate planning ” — a will or trust, a power of attorney and a living will — so that you know what their wishes are while they are still able to tell you.
Supporting a special needs child
If you have a special needs child who will depend on you after you retire, making provisions for that child should be a major priority in your retirement plan.
Some potential financial relief comes when a disabled child turns 18, at which point his or her eligibility for Social Security income is no longer restricted by how much his or her parents earn. Adults with a disability diagnosed before age 22 also are eligible for Social Security Disability Insurance benefits, based on the retired parent’s Social Security earnings. The adult child is not required to have worked to receive those benefits.
One of your priorities will be to ensure that your special needs child will be taken care of after your death. Motz says the options include setting up a trust or purchasing a permanent life insurance policy whose proceeds can be used for the child’s needs. But beware of leaving any such assets in the child’s name.
“You can disqualify a child for Social Security and Medicare if they have too much in the way of assets, so it’s really important to work with an attorney who has a specialty in special needs planning,” Motz says.