Retirement Needs Based on Budget Calculations

Another commonly used method to determine your potential retirement needs is to compare your current budget with a projected retirement budget. Although more time consuming and complicated, using this method can provide you with a more realistic idea of what you'll need during retirement.

If you haven't had to do one before, a budget is basically an itemized list of your income and expenses over a given period of time. Businesses make budget projections on a weekly, monthly, quarterly, and yearly basis. For individuals, a monthly budget should suffice.

Some people get by without a budget and may not see the need for one in the future. If you are the one making money and paying the bills each month, you may think that you already have a good idea of what your monthly income and expenses are. However, a closer look may surprise you.

Financial Calculators Use the Budgeting Calculator to find out where your money is going. Enter your income and expenses, and then click on the "view report" button to compare your budget breakdown to our targets. This will help you identify areas for improvement.

Remember that the more thorough you are, the better your projections will be. Calculating your income is usually pretty straightforward. For most, there will only be a limited number of sources of potential income.

When considering your expenses, however, don't forget to include the following items under each category:

• Housing. For most people, the expenses in this category will be the major drain on their finances. This category includes all housing related expenses like rent; mortgage payments; utilities (gas, water, electricity); telephone; garbage disposal; property taxes; home maintenance, repairs, and improvements; and furnishings.
• Food. This is another major category. It includes grocery purchases; beverage purchases (alcoholic and nonalcoholic); and restaurant costs.
• Clothing. Included here are purchases for clothing, shoes and accessories. Also included are any related cleaning and repair costs.
• Support of children. From prenatal care to empty nest, these costs should include all child-related expenses. If your children continue to live with you as adults, factor in any additional costs like food, telephone and utilities usage.
• Support of relatives. If you have parents or other relatives who rely on you for their primary support, your monthly expenses can easily double. In essence, you have to factor in every one of the expense categories for each additional person you support.
• Entertainment. Although not a necessity, the expenses in this category can quickly mount up, especially when you have greater free time. These expenses include the costs of hobbies; movies; concerts; reading material; sports activities; video rentals; cable TV; Internet access; vacations; and club memberships.
• Transportation. Given the increasing cost of gas, these expenses can be a big chunk of your budget. Other costs to factor in are car payments; vehicle modifications due to handicap; car repairs; licenses, registration and fees; tolls; parking; and public transportation.
• Personal care. Looking and smelling good costs money. These costs can vary, of course, depending on the person. This category includes the costs of personal grooming items, cosmetics, haircuts, manicures, facials, pedicures, mud baths and body wraps. You can also choose to lump cosmetic surgery here or under the healthcare category.
• Healthcare. These costs cover everything from a bandage to major surgery. If you are lucky, these costs will usually involve just routine medical and dental check-ups, glasses, prescriptions and nonprescription medicines, and first aid items.
• Insurance. Considered here are the various forms of personal insurance you may have. Usually, this includes health, auto, home, life, and disability insurance.
• Debt. Your creditors don't forget the money you owe and neither can you when calculating your retirement budget. If you regularly have high credit card balances and can't curb your spending, you have to factor this in during retirement. Also, if you use debt to help finance your retirement, likewise factor the required payments into your budget.
• Gifts. Charitable donations, gifts to family members and various holiday presents may not be part of your budget each month, but don't forget to include them in your calculations. To get around the fluctuations in these expenses, add the cost of your gifts for the whole year and just divide by 12 to come up with a monthly figure.
• Retirement savings. Although this sounds strange, you may continue to save for retirement even after you retire. After you determine how to do this, factor the savings amount into your retirement budget.
• Savings (other than for retirement). Just because you retire, it doesn't mean that you can stop saving money. You need to continue having good money-management skills that include saving money (when possible) in your post-retirement years.
• Miscellaneous. The specific categories probably cover most expenses that you will have. However, you may have special needs, with their own associated costs, that can't otherwise be pigeonholed. Whatever you do, don't leave such costs out of your calculations. Instead, factor them in under the miscellaneous category.