Chapter 5. How to forecast a retirement budget?

One key element in planning for retirement is to forecast a retirement budget so you can invest with the end in mind. To achieve a good estimate, you need to use your current budget as a base for future forecasting (after you project many adjustments). You will have to deal with so many uncertainties, as no one knows what the future will bring. So, what you forecast is just a guide to calculate a minimum amount you have to maintain for sustaining your standard of living in future years.

 

How to

Here are steps you would follow to forecast your retirement budget. 

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  1. State all your current expenses and divide them into fixed, mixed, and variable ones.
  2. Examine each category and note adjustments.
    For example, if you plan to stay in your current home, you can easily determine if you will be mortgage free at retirement or not. You know approximately the cost of keeping your house and all related expenses such as real estate tax, repair, maintenance, etc.
  3. Allocate a dollar amount to each adjustment, up or down.
    For example, you allocate zero amount for a mortgage on your house, but you state an amount of real estate tax, insurance, repair, and maintenance.
  4. Delete items from your budget that you will no longer need after retirement.
    For example, professional clothes or work transportation may not be necessary after you retire.
  5. Add items to your budget that will be deemed necessary after your retirement.
    For example, you may need more budget for medical expenses or a special diet after you retire.
  6. Add items to your budget that you will want to do after retirement.
    For example, if you want to travel or play golf more often after retirement, such things should be included in your list. 
  7. Make all other adjustments until you reach a minimum dollar amount you must have at retirement. Be honest with your calculations and careful not to over or undershoot. This amount will help you and your financial adviser formulate a plan to determine the present value of your investment so your future will be protected accordingly.

 

Practice

Now that you know how to forecast a future budget to help you in making retirement plans, think of paying it forward and discuss adjustments to budget in old age with a friend or a family member.

 

Congratulations! Now Test your knowledge about Retirement planning!

Would you like to review again? You can start over at Introduction.

To review the full module on Retirement planning, click here.

 

The Penn State Sokolov-Miller Family Financial and Life Skills Center hopes you have enjoyed this module in the MoneyCounts: A Penn State Financial Literacy Series. Please tell us how we can serve you better, leave us a feedback, ask a question, or request additional information at: finlit@psu.edu