Even if you have never, ever kept track of your money, you need to start a budget in midlife if you have any hopes of realizing the retirement you have dreamed of your entire life. And honestly, it doesn’t have to be complicated or mega restricting. All you have to do is prepare for and make adjustments BEFORE you work your last day. It is not too late. And I promise you, it is not as painful as it sounds.
This past week, my husband has been invited to a slew of retirement parties. But rest assured, it is not the last time that he will see his co-workers. You know why? Because after they retire, they almost always, sooner or later, come back as “casuals”. I am astonished at the number of people that retire with absolutely no plan in place on how they are going to manage their lower income. Once they figure out that they can no longer meet their financial obligations, they have to go back to work with their tails between their legs.
Unless you have a large sum of money sitting in your bank account, or have a pension that will equal your working income, you need to keep track of your current expenses and adjust them to suit your future reduced income. Failure to have a clear snapshot of your future financial position will ensure you having to struggle and/or have to supplement your income in retirement. So grab a coffee and a notebook and let’s get to work.
There are many apps and computer programs that can help you set a budget and track your expenses but I find doing it the old fashioned way, on paper, is the best way. You can always transfer your information to another method once you have all the numbers gathered.
How To Start A Budget In Midlife For Retirement
Step #1 : Determine your monthly retirement income.
This may take some digging and research. My husband gets a statement at the end of every year that indicates what his retirement income will be when he retires. What income sources will you have? Gather all the information. Find out exactly how much your income will be from all sources and write that down on the top of your page. Write down the number of months till your retirement too.
Step #2 : Log all of your current fixed monthly expenses.
This list should include your mortgage/rent, HOA fees, taxes, utilities, car payments, child/spousal support, insurance etc. Record the interest rates if applicable. Beside the expenses that have an end date, write down, in months, when you will no longer have that expense.
Step #3 : Log all of your current flexible monthly expenses.
This list should include gas, groceries, cell phone, cable, internet, entertainment, eating out, beauty, vacations, clothing, gifts, household supplies, incidentals, etc. Not sure what you spend your money on? Grab 6 months of bank and credit card statements and record everything you spent your money on. Add up each expense and divide by 6. This should give you the average you spend monthly for that expense.
Step #4 : Log all creditors, balances, interest rates, and minimum monthly payments.
This list should include all credit cards, lines of credit and outstanding loans not listed in Step #2. Calculate the number of months needed to pay off each debt making the minimum monthly payments.
Step #5 : Subtract your total monthly expenses from your projected retirement income.
How you doing? Do you have a negative balance?
Step #6 : Analyse your data, set goals and make an actionable plan to reduce expenses using your current income.
You should now have a clear snapshot of your future income and your current fixed and variable expenses. If you have a large negative balance from step 5, you have a lot of work to do. Fortunately you have your current income (which is hopefully higher than your retirement income) to help you widdle down and maybe even completely eliminate a large number of your expenses before you reach retirement.
Great goals to set:
- Reduce retirement expenses.-Look at items on your list under steps 2 and 4. Look at the column that has the number of months left till zero balance and compare that to the number of months you have till retirement. Put an “X’ beside any item that will no longer be an expense once you retire. Now look at the expenses you have left. These are the categories that you want to budget in additional monies with your current income so that you can eliminate them before you retire. Your goal is to eliminate as many as possible.
- Reduce, substitute and/or eliminate variable expenses.-These are on your list under step 3. This is where you can do some magic and get creative. If there are expenditures here that from this exercise you have found are way too high (example:eating out), now that you are aware of your over-spending, you can create a budget to reduce it.
- Save and find more money to reach your goals by analysing interest rates.-If you have items on your list from steps 2 and 4 that have exceptionally high interest rates, it is a great idea to work on reducing these expenses first, regardless of whether the zero balance date happens before your retirement. If you eliminate high interest rate expenses, you will have more money to put towards other debt, thus accelerating this whole process.
Step #7 : Set up an emergency fund and a savings account.
Once your retire, you no longer have the chance to work overtime to cover surprises that come up. As you age, it is not unusual to have extra expenses crop up related to your health. (drugs, hospital stays, nursing care) You need to start putting away money for unforeseen expenses. Not having enough money for your essentials is very stressful. Don’t add that on to your plate. Open up a bank account that you can only access by walking into the bank. This prevents you from pulling out your debit card and using your savings account for purchases. Automatically transfer money to it every pay.
The above system is a very basic start to creating a budget. I did not want to overwhelm you with a whole bunch of steps and calculations. What I hope I have done is encouraged you to begin.
Click on the image below to download a FREE printable to help you record all of your information.
The purpose of this exercise is to give you a good idea of where you are financially right now and where you will be in the future. If you can not answer questions like, how much do you spend on groceries every month, what is your total consumer debt, and what are the associated interest rates, then you need to complete the steps above and get working on a budget ASAP before you retire and have to live on a reduced income. A successful retirement depends on you knowing exactly where your money is going right now.
What have you done to ensure you don’t have to supplement your retirement income once you leave your job?