Episode 62 Retirement Budget

Two of the biggest questions I get about retirement are “How much do I have to save” and “Do I have enough?” But first we have to step back and answer the question “How much will I spend in retirement?”  I recommend you map out your current cash flow, also called a budget, in detail. Spend some time envisioning the kind of lifestyle you want in retirement. Then make adjustments from your current cash flow to build a retirement budget.
Let’s start with income. Pull out your Leave and Earnings Statement and pay stubs. Military look for your total entitlements. Federal civilians look for your base pay plus locality pay . Working spouses and others use a recent pay stub. Jot down these sources of income. 
Do the same for expenses. Look for deductions and allotments. Then list t other expenses you pay and categorize them. If possible use a year’s worth of expenses. If you don’t already keep a detailed list of expenses, now’s a good time to start. For now make an educated guess and begin logging your spending. A budgeting app like YNAB or Mint may help.
Now  adjust your current expenses to estimate your retirement expenses. Here are some expenses that often change in retirement. Social Security and Medicare taxes are only withheld from money you earn through work. Retirement savings like the Thrift Savings Plan (TSP), 401(k) plans, and IRAs a will stop when you stop work. Drop these expenses from the retirement budget. Will  your household living expenses like rent, utilities, income taxes, entertainment, charity, and travel? Adjust the budget.
 If you pay off a mortgage, remember you still have to pay your property taxes and homeowners insurance. Will you downsize? Less expensive homes usually have lower property taxes, costs of insurance, utilities, and maintenance. If you want to buy a vacation home your total housing cost will go up.
 Food and commuting costs often go down in retirement. Plan on traveling a lot or starting an expensive hobby? Add those higher expenses down in the budget.
Your healthcare costs are likely to go up. Tricare for military retirees is very reasonably. Get costs at https://tricare.mil/-/media/Files/TRICARE/Publications/Misc/Costs_Sheet_2021.pdf However, many military retirees are surprised once you reach age 65. You will be moved to Tricare for Life, which is free. But you are required to sign up for Medicare Parts A&B.  Generally there's very little  out of pocket expenses. But, you have to pay Medicare Part B premiums, which will be higher than your Tricare Prime or Select premiums were.  https://www.medicare.gov/your-medicare-costs/part-b-costs
Federal retirees can carry FEHB into retirement. The premium you pay will be the same as working federal employees, but due to premium conversion you will pay more in taxes.  For everyone else, your employer likely paying a large part of your premiums which will much higher if you stop work before Medicare kicks in at 65. Healthcare expenses like nursing home care are a wild card and can spike near the end of your life. Budget for that spike or for long term care insurance premiums.

Once you know what expenses you need to pay in retirement, you can begin planning how to have the income to cover it. Coming up short? The earlier you know this the better. You have time to adjust. You might decide to seek a higher paying job now to save more, retire later, or work part-time in retirement. It’s your retirement and planning early can help you have it your way. Would you like help answering your “Will I have enough?” questions? I love helping clients like you budget, plan, and save for the future you want. You can email me at katie@moneypilotadvisor.com

Transcript

Kathleen Cannon: 0:14

Welcome to the Money Pilot Financial Advisor Podcast, where you team up with Money Pilot host, former Army helicopter pilot, and your host Katie Cannon to put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and lead your financial life. Hello, and welcome back to Episode 62, where we're talking about you turning age 62. I know, I know, it's a long way off. But financial planning is all about you and planning. So let's take a look at the future. First for our federal employees, you may remember from Episode 46 FERS Retirement Date, that waiting until age 62 comes with some bonuses, like using the 1.1% multiplier when calculating your retirement pay. If you have more than 20 years of service. And FERS employee cost of living allowances increase beginning at 62. Also, CSRS and military retirees you receive COLA increases right away. Go back and give Episode 46 and other listen for more details. Another key milestone is that if you're eligible for Social Security, you can begin receiving it at age 62. CSRS federal employees don't pay into Social Security. So you aren't eligible to receive Social Security based on your federal employment record. But FERS federal employees, military and most everyone else. Again, if you're eligible, you can start so security at 62. But I don't usually recommend it. If you start your benefits at 62, those benefits will be a lot lower than if you waited until your normal Social Security retirement age, which is between 65 and 67 depending on when you were born. So we'll go more into depth on social security in Episode 66. Now all these 62 milestones got me thinking a bit more broadly about preparing for retirement. Two of the biggest questions I get about retirement are "How much do I have to save?" And "Do I have enough?" But to plan for your retirement future, we have to take a step back first and answer the question, "How much will I spend in retirement?" And then we can build from there. There are some rules of thumb that can be helpful. For example, some people suggest that if you want to maintain your same standard of living in retirement, you should target having a retirement income that is 75 or 80% of your working income. And this may be a helpful target. But this one size fits all goal might not be the best fit for you. The big assumptions in this percentage is that your expenses will go down 20 or 25% in retirement, and that you're looking at your total income and expenses and not just your take home pay. Instead of this percentage method, I recommend you map out your current cash flow, also called the budget in detail. Spend some time envisioning the kind of lifestyle you want in retirement. And then make adjustments from your current clash flow to build a retirement budget. Uncovering your actual current expenses is kind of confusing for a lot of people. So that's where we'll start today. Don't be intimidated. It does take some basic math, but it's not rocket science. When most of us think about our income, we usually think about take home pay. That is what shows up in our direct deposit on payday is our income. And the bills we pay with that is our expenses. So what's complicated about that? Well, using your take home pay, you're missing income and expenses that are pulled from your paycheck before you get it. And these expenses are likely to change in retirement. So to get a solid current cash flow or budget picture, start with your leave and earning statement and pay stubs. For military look at your total entitlements. You'll see that includes your base pay, your BAS, BAH, special pays, COLA if you're overseas and all that. Federal employees will look at your base pay plus locality pay for your total. Generally ignore pays that aren't consistent, like TDY. For working spouses and everyone else, pull out your recent pay stub. It should be organized in a similar way, with a total of everything you earn. This is your income. Way different than what shows up in your bank account on payday isn't it? Jot down these sources of income. Or if you're a numbers geek like me, you can put them in an Excel spreadsheet. Next, we'll tackle expenses. Start again with your LES or pay stub. Now look for deductions and allotments. Jot down each one with the name and amount. For military don't include the deduction for mid-month pay, that money was paid to you. It's not an expense. But everything else that comes out of your pay is an expense. This step is very important because these expenses that show up on your LES and pay stub probably will be different in retirement. All right. Now you have your total income and expenses that come directly from your pay. Now you need to make an accurate list of all the other expenses you pay. Categorize these in a way that makes sense to you. And try to avoid a miscellaneous category. If you're using a budget app, pull up a year's worth of expenses if you've been using it that long. If you don't use a budgeting app or don't really keep a detailed list of expenses, now is a great time to start. You can use credit card statements, canceled checks and other payment systems you use like PayPal or Venmo to reconstruct where you spend your money. If you're starting to feel overwhelmed, that's normal. Take a deep breath and hang with me. Accuracy is more important than speed at this point. But if doing the equivalent of an archeological big to uncover your actual expenses just isn't going to happen. Take a moment to think about where your money goes. and jot down your best guess for the different categories. You probably know things like rent, mortgage, utilities, off the top of your head. For everything else, make an educated guess and move on. Then starting now, keep an accurate log of your spending. Many people including me find the easiest way to do this is with a budgeting app. YNAB that's Y N A B, which stands for You Need A Budget and Mint are just two examples. Test drive a couple and see which one clicks with you. After three months and again at a year, check to see where your money is really going. And keep updating your expense list as necessary. You'll probably find that you missed some irregular expenses like Christmas gifts, heating oil, car inspections, summer sports and property taxes. Just keep refining your budget over time. All right. Now you should have a solid cash flow foundation of your current income and expenses. You can now make adjustments to estimate your expenses in retirement. Many of them may be the same. But let's explore some expenses that often do change in retirement. First, Social Security and Medicare taxes are only withheld from money you earn through work. If you plan to work part time in retirement include an expense for those taxes. It'll be 7.65% of your pay. And that's taken out automatically by your employer. You don't pay this tax on pension income, or TSP, 401k, or IRA withdrawals in retirement. So unless you're working part time, you can drop that expense off your budget entirely. Money you're saving for retirement like TSP every month, 401 K's and Individual Retirement Accounts or IRAs are other expenses that go away when you're no longer working. So those expenses are dropped from the retirement budget too. Next, take a look at your household living expenses today. Both fixed ones like rent or mortgage utilities, taxes, and things you have more control over, like eating out savings, entertainment, charity and travel. Do you see any big changes in your retirement future, make adjustments to your retirement budget to reflect that. Housing costs is an expense that may really change in retirement. If you're living in post housing, that's not even in your budget at the moment. Those of you posted overseas may be paying much higher rent than you will in retirement back in the states. If you own the home you live in, will pay off your mortgage before you retire? If so, that expense will obviously go down. Just remember that if you have a mortgage now, checks to see if your property tax and homeowners insurance are included in your monthly payments. They often are. So once your mortgage is paid off, the portion of your payments that are for the loan principal and interest will stop. But you will still have to continue paying your property taxes and insurance. So be sure to include that in your retirement expenses as well. Also, do you want to relocate, downsize, or maybe buy a vacation home? If you plan do downsize, less expensive homes will usually also have lower property taxes, cost of insurance, utilities and maintenance. So if that's in your plan, you'd reduce your expenses and your retirement budget. On the other hand, if you plan to stay put and buy a second home, like in Florida, your total housing costs will actually go up significantly. Next, let's look at other living expenses that may change with your future retirement lifestyle. For example, retiree food costs often go down in retirement, retirees tend to have more time at home to prepare food than they did while they were working, and more time to shop for deals on groceries. If you have a long work commute, your current gas expenses may also be less than retirement. But don't assume an expense will go down in retirement. Think about your retirement lifestyle and crunch a few numbers. Do you want to do a lot of traveling or take up an expensive hobby job? Those higher expenses down in the budget. They may outweigh savings in other areas like food. Healthcare is one major area where your costs will likely go up. You may not even realize the current cost of your health care. Active duty military health care is completely provided with no premiums or co pays. Military retirees can pay for Tricare once they retire from active duty. Gray area retired reservists are also eligible for Tricare coverage when you reach age 60. Tricare is very reasonably priced. To get the expense details for your budget, go to the Tricare website. A link to a cost sheet is in the show notes. However, many military retirees are surprised by the costs of health care. Once you reach age 65 you'll be moved from Tricare Prime or Select to Tricare for Life. Tricare for Life is free, no premiums and no co pays. So Tricare expenses will drop from your budget altogether. At 65 as a part of Tricare for life, though, you're required to sign up for Medicare Parts A and B. Medicare will pay your health costs first, then automatically send the rest of the bill to Tricare for Life for payment. This generally works smoothly and results in little or no out of pocket expenses for military retirees. But you do have to pay Medicare Part D premiums, which will be higher than your Tricare Prime or Select premiums were. Depending on your retirement income, your Medicare Part B premium will be between $1,700 and $6,060 a year. You can see the Medicare Part B premium costs at medicare.gov and I'll put a link to that in the show notes as well. Federal retirees, you can carry your Federal Employee Health Benefit or FEHB into retirement. The premium you pay will actually stay the same as working federal employees. But due to something called premium conversion, you'll actually pay more in taxes. For example, if you're in the 22% income tax bracket, your health insurance premium expenses will be 22% higher in retirement. For everyone else you likely pay for health care through your employer. But you may not realize that your employer is paying a large portion of your health care premiums. Your health care insurance costs may be significantly higher after you retire if you choose to stop working before you reach 65 and not yet eligible for Medicare. If this applies to you, take time to find health care coverage and budget for that before you make the leap into retirement. Also, healthcare costs overall for retirees tend to go up faster than general inflation. All in all, your health care costs likely will take up more of your budget in retirement than they do now. It's worth looking at your options and taking time to estimate your specific health care expenses. Another thing to keep in mind, there's a tendency for household expenses to be on the high side just after retirement, when spending on travel and leisure may be higher. A dip in mid retirement then the trend up again toward the end of life as healthcare costs increase. In particular, if you don't have long term care insurance, your health care expenses like home health aides or nursing home care can be a big wild card and could spike near the end of you or your partner's lives. You'll want to consider this and other big ticket items like a new car or major home repairs in your retirement budget to working through each of these line items can get you closer to your real retirement expenses. Even with the best planning though, there will be future spending that you can't foresee. You may help out adult children or other family members financially, or have some random costly repair bills which unexpectedly increase your expenses in retirement. So consider adding a bit of fudge factor to your estimated retirement expenses as a cushion. All right, I know this has been a lot of information. But to sum things up, the foundation to knowing if you will have enough money to retire is first making an accurate projection of what your retirement will cost. Start now tracking your current expenses. Both those taken directly out of your paycheck by your employer, and those expenses you pay from your take home pay. Refine your current budget as you go. After you have a full year of data, you should have a solid current spending picture. Take time to envision what your retirement lifestyle will be. Where will you live? What will you do? Then go category by category and adjust the dollar amount of each one to reflect the expenses in your particular retirement. Some will be less, others will be more. Then once you know what expenses you need to pay in retirement, you can begin planning how to make sure you will have enough income or you're coming up short. The earlier you know this the better. You have time to adjust. You can make different choices to lower your expenses. You might decide to seek a higher paying job now to save more, retire later, or work part time in retirement. It's your retirement and planning early can help you have it your way. Would you like help answering your "Will I have enough" questions? I love helping clients like you budget, plan, and save for the future you want. You can email me at Katie@moneypilotadvisor.com and I'll talk with you next week.

Announcer: 18:53

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