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What to consider when planning your retirement household budget

There’ll likely be a big difference in your budget when you retire versus when you’re still working. Here are a few things to think about when planning your retirement expenditure.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Totting up your essential household expenditure should always be top of your list when it comes to planning your retirement.

But you might find that your regular outgoings change in the years leading up to your retirement and when you finally finish working.

A good place to start is our household budget calculator. It won’t show you how your outgoings might change over time, but it will give you a calculation based on a point in time you choose (whether that be now or in the future).

Here are a few extra things to think about when planning your retirement expenditure.

Remember, everyone’s income and expenditure will be different, so don’t take this as personal advice. If you’re at all unsure, ask for financial advice.

Your Monday – Friday spending habits

The pandemic has taught us that working from home can save us money. That morning coffee or buying a sandwich for lunch might seem like small expenses, but they can all add up.

In 2020, the average cost of a regular latte was £2.63 for example. Let’s say you have one every working day. Even just cutting the amount you have in half would save you £341.90 a year. That’s a fair chunk of change.

What’s important with this example and others like it is that small purchases can over time add up to large amounts.

Of course it’s nice to treat yourself to the things you enjoy. But it’s always worth questioning what you’re happy to spend, and see if you can make any savings that you can put to better use.

There’s also the cost of commuting. Whether you’re putting £50 of fuel in the car every week or buying a travel card, the cost of travel is a cost you’re likely to recoup some of when you retire. But how much you recoup will of course depend on where you travel when you retire. Maybe you’ll take more day trips in which you actually go further than you would to go to work.

Also think about how your household bills might change when you retire. If you’ve worked from home during the pandemic, you’ve likely had the heating on more often and boiled the kettle more than you usually would during the working week. If you’re at home more when you retire, this increase to the meters might become more permanent.

Larger costs can be covered when you’re working

Do you drive a company car? Perhaps you have private medical cover, dental cover or life insurance covered by your workplace?

If you have perks like these included in a workplace package, you’ll need to think about how you’ll cover them when you stop work.

In particular, we typically say life insurance is a must-have. It only gets more expensive the older you get. So be sure to factor that into your budget when you retire.

Unexpected costs

When a big outlay comes out of the blue while you’re working, it’s likely to be less of a problem. That’s because you know you’ve got another pay cheque coming next month.

When you retire, your income will most likely fall. So, it’s important to set aside some budget for emergencies. When you’re working, we think it’s a good idea to have three to six months’ worth of essential expenditure to one side in easy-to-access cash. When you retire, it should be more like one to three years’ worth.

You might also choose to use some or all of your pension to buy an annuity so you have a more regular flow of income to help you pay for such unexpected costs. But this shouldn’t be a substitute for having an emergency cash buffer.

The government’s free and impartial Pension Wise service is a good place to start to help you understand your retirement options.

Lifestyle changes

You might find you actually save money by not going to work. But that doesn’t mean you’ll have more disposable income if your retirement income is less than your working salary.

So, once you’ve covered all the essentials, how much money will you need to have some fun?

This is the exciting part of retirement planning. Whether you’ve been dreaming of more travelling, making a big purchase or a series of smaller ones, knowing how much you’ll need to achieve these goals and when is crucial.

Make sure you calculate if your retirement lifestyle will be more expensive than your working lifestyle. And importantly, whether you’ll have enough left in your pocket to live it once you’ve paid all your bills.

For the bigger expenses like luxury travel, it can help to draw up a timeline of what you want to do and when. But don’t forget about lower cost activities like eating out more regularly, day trips, leisure activity memberships and so on.

Will it be a net gain or a net loss?

That’s the big question. And one that’s not easy to answer because there’s a lot to consider.

Budgeting is the perfect place to start your retirement planning, but that’s just the tip of the iceberg. You’ll also need to think about:

  • Your retirement income options when you retire
  • Using your tax allowances effectively
  • How you’ll pay for later life care
  • What to do about passing on your wealth

Financial advice can help you budget, plan your expenditure and help you understand all your options.

Taking advice a few years before you retire can be a good idea. It can give you time to adjust your strategy if you need to and retire on your terms.

Find out more about retirement planning advice

What did you think of this article?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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