Some might say that trying to predict personal costs for every month for the next 15-30 years is preposterously impossible. But you know that if your clients want a secure retirement, they need to predict how much they will spend. You undoubtedly have a method for forecasting retirement income and finding the overall amount needed. Here, we have 9 tips for bringing budget predictions down to more bite-sized steps that your clients can understand.
- Think in 5-year increments. When you think of a budget, you probably think about a monthly budget. However, documenting monthly expenses for 360 months (the number of months in a 30-year retirement) seems daunting. The trick to any hard task is to break it down into smaller pieces. For your retirement budget, try thinking in 1-, 3- or 5-year increments.
- Budget based on the phases of retirement. Retirement can be broken down into four rough categories: Transition, Early Retirement, Late Retirement, and End of Life. Each stage has its own associated expenditures.
- Tackle the 'Big 3' retirement budget categories separately from everything else. If you are anywhere near average, most of your money is spent on housing, transportation, and medical expenses.
- Predict big one-time retirement expenses. Will you be spending on education for children or grandchildren? Travel? A second home, boat, RV, or other recreational pursuits? Contributing to help fund care for aging parents?
- Know when your mortgage will be paid off—and consider retirement housing options. It is a big deal to pay off a debt and it can have a tremendous impact on your retirement security. Downsizing is a popular choice for retirees. Getting a reverse mortgage or moving to a retirement home are other common scenarios that will have a profound impact on your retirement expenses.
- Don’t forget to budget for the unexpected. As much as you want to get your retirement expenses right, there are bound to be unforeseen costs. One way to deal with this is to set aside 3-6 months’ worth of living expenses into an emergency fund.
- Find the right level of detail for predicting ongoing retirement expenses. Some experts recommend that you create budgets with nearly 100 different categories. Others say that you can predict expenses with just 5 buckets. Play around with different options and customize a list that works for you.
- Think about needs vs. wants. Our needs are things that you must spend money on to get by: groceries, utilities, transportation, health care, and housing. Your wants are things that are nice-to-haves—but not necessary to survival—travel, hobbies, entertainment, etc.
- Create a retirement plan. And of course, it doesn’t matter too much what strategy you use for predicting expenses, as long as you have a detailed and personalized retirement plan. And that is were you, the advisor, come in!
You can find the full article at www.newretirement.com.