A Simple Guide to Your Retirement Budget

9 min read • Published 13 November 2022
Written by Krishna Deshmukh
Guide to making your retirement budget

A retirement budget helps you create an estimate of the income and the expenses you and your family might undergo after your retirement. These expenses can be daily expenses which an individual generally has, or emergency expenses like hospitalisation and medical urgencies, education costs, etc. It is not uncommon for people to face inadequacy of funds after retirement due to negligence in financial planning. 

As an individual, you have been working hard your entire life to enjoy a peaceful retirement. This plan can get hindered if you run out of your savings in no time post-retirement. Creating a financial budget for retirement is necessary to avoid such a situation.

Easy Tips for Making a Retirement Budget

Now that you have understood the necessity of making a retirement budget, here are some easy tips which you can consider before doing so:

  1. Calculate your Retirement Age

You can calculate your retirement age after assessing the number of working years you have left. If you have more than 30 years before retirement, your investment portfolio can withstand more risk. However, make sure to keep a check on the performance of your investments, especially the ones that have high volatility risk. 

Generally, with age, your profile should focus more on income and the preservation of capital. This means you need to allocate your funds to low-risk securities. Although they might not offer you aggressive returns, they can provide enough financial security to rely upon. An older individual planning for retirement should not make the same investment decisions as a young individual. 

Additionally, make sure to keep inflation in mind while calculating your retirement age. Inflation is the rate at which the prices of goods and services increase. With a rise in inflation, the purchasing power of an individual decrease and vice versa. Besides, the value of fixed assets, price of goods and services, financial markets and composition of investment portfolios get affected. Hence, your investment decisions as per your age should help you outpace inflation and maintain your purchasing power post-retirement.

  1. Calculate the Expenses you will Incur after Retirement  

Assessing your spending habits while making your retirement budget will help you plan the size of your portfolio. Most individuals assume that their financial expenses will get reduced significantly from their current expenses after retirement. However, depending on such an assumption might be risky as these are often proven unrealistic, especially during sudden medical emergencies. 

Additionally, you might have a bucket list wishing to purchase a new house after retirement or send your children abroad for higher studies. Of course, these expenses need to be included while planning the overall budget for your retirement. Hence, as an individual, you must update your retirement budget responsibly once a year to keep your savings and investment on track.

Another factor that you should keep in mind while making your retirement portfolio is the withdrawal rate of your investments. This is very much connected to the accurate estimation of expenses as it shows the amount you can reinvest or withdraw every year. Thus, if you manage to outline your costs, you are subtracting a huge burden of risk and focusing on investment. Moreover, consider your longevity and plan your budget so that you do not outlast your savings.

  1. Determine the Tax Incurred on Investment Returns

Once you have determined the return on your investments and approximate expenditure, you need to compute your after-tax real return rate. Also, as you grow older, consider focusing on making low-risk investments which may reduce the ROI significantly, but you will be offered stable returns.  

The taxation of investment returns generally depends on the type of investment plans an individual holds. Determining the taxability before withdrawing funds is a crucial component of planning the retirement budget.

Additionally, investments made in retirement policies offer a plethora of tax benefits. However, to get these benefits, you need to acquire adequate knowledge and invest your savings accordingly. You can even take the help of a financial management advisor to plan things in a better way.

  1. Plan your Estates Properly and Stay on Top

Planning your estates is another important way to build a retirement plan and ensure better asset distribution. However, it requires the knowledge and skill of different professionals, such as lawyers and accountants, to plan it better. 

Moreover, life insurance policies play an important role when it comes to planning your estates and your retirement budget. Try to manage your estates in such a way that will ensure a financially secure life for your family after death. Additionally, a carefully outlined plan helps avoid the expensive and lengthy estate confirmation process. 

Another important part of planning your estate is assessing the amount of tax incurred. For example, if an individual passes his assets to a family member or donates it to charity, there will be tax implications that you would need to consider.

It is ideal to consult a financial advisor if you face any difficulty while planning your estate. 

  1. Assess Risk Tolerance on Investment Goals

Proper portfolio management and allocation are important in retirement planning as they help to balance the risk and return on investment. If you are unable to manage it properly, get a professional money manager to assess the risk associated with your investments. However, before assessing risk, you should assess your risk capacity and the amount you need to set aside to reduce your financial burden.

Before managing risks associated with your portfolio, it is ideal for acknowledging that markets can go through continuous cycles of bullish and bearish trends. So the value of your portfolio can increase or decrease on short notice. If you are planning a retirement budget, it is ideal to look out for long-term market trends instead of focusing on short-term price changes. 

Steps to Calculate Your Retirement Budget

You should also know the steps for calculating your retirement budget. Budget calculating can help you plan your finances accordingly.

Step 1: Calculate your Income

The first step while calculating your retirement budget is to calculate the amount of money you generate as income, monthly or annually. Here, you must add the total returns you will get from all the pension policies or investments. To plan your retirement budget easily, make sure to keep track of all your income sources. 

 Step 2: Determine your Existing Expenses

After calculating your total income, the second step is to figure out your current expenses such as electricity bills, phone bills, subscriptions, shopping, etc. You might find this step questionable as there’s no direct relation between your current expenses and your expenses after retirement. However, there will indeed be slight or hardly any variation in these two situations. You can refer to a previous month’s bills, consider the factor of inflation, and estimate the approximate future expenditure.

Step 3: Compute any New Expenses

You might need to incur additional expenses during your old age. For example, expenditures on healthcare usually spike up during retirement as it is very common to have more health issues during old age. Although you can purchase policies to adjust your healthcare expenses, saving funds for your future is still a better option.

Step 4: Find out your Savings

After computing your total income and expenditure, you should subtract them and calculate your current savings. This will not only give you an estimation of your future savings but also allow you to plan your retirement budget more easily.

Importance of Having a Retirement Budget

Retirement budgeting is an important step in financial planning that will help to secure your life with adequate funds after retirement. The importance of having a retirement budget has been discussed below:

  1. For maintaining your current standard of living post-retirement 
  2. There might be more financial hindrances during your old age, so planning is necessary to avoid such situations.
  3. According to surveys, the average life expectancy has increased, so more funds are needed to suffice the additional retirement years.
  4. To check off your pending bucket list after retirement, you should plan your retirement budget.
  5. You can enjoy more tax benefits if you have a proper retirement plan and start planning early.

Final Word

One of the most challenging factors in making a retirement budget is to balance your desired standard of living and the return expectation from your investments. It is crucial to create a diversified portfolio and update it regularly according to the changes in market conditions. Additionally, investing religiously will also reduce the burden of retirement planning.  

Frequently Asked Questions

How much do you need to save for retirement?

It is not easy to predict the amount you need to save for retirement as it depends on your current income and living standards. However, a rule of thumb is to save approximately 15% of your gross annual earnings every year to suffice for living after retirement.

Where to invest to get the best financial benefits after retirement?

As an individual, it is important to decide where to invest in getting the best returns after retirement. It depends on your financial goals, the amenities you wish to have after retirement, and your forecasted expenditure. You can opt for a diversified portfolio to accumulate a retirement corpus by investing in Provident Funds, Annuity Plans, Mutual Funds, Bonds, etc. 

What is the 80% rule in retirement planning? 

Some financial experts advise following the 80% rule to plan your post-retirement finances. The rule states to target a retirement income that’s 80% of your pre-retirement income,  to maintain a lifestyle that you are accustomed to pre-retirement. For example, if you earn Rs. 10 lakh per year, your post-retirement income should be something around Rs. 8 lakh per year. 

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Krishna Deshmukh

Investment Principal
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk.

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