The importance of preparing an accurate budget that will allow you to live comfortably through retirement can't be stressed enough. Your initial step in budgeting should be estimating what your expected expenses might be during retirement.

Some financial advisers recommend that this figure be calculated as 80% of whatever your current expenses are. The theory being that your expenses in retirement, if your mortgage has been totally paid off, should be about 20% less than your current expenses. However, there are several flaws in calculating expenses in such a manner. For example, the estimate is only accurate if you don't have a mortgage. It also doesn't account for unplanned events, such as a roof collapsing or substantial termite damage. Therefore, budgeting based on 80% can leave you short if certain expensive unplanned events occur.

These potentially devastating flaws have resulted in most financial experts recommending a three-pronged retirement-focused budget. The three prongs, what's needed, what's wanted, and what could happen, are the basis of the budget.

What's Needed

This prong includes the basics that you'll need during retirement. While individual lists will vary, most will include food; shelter; clothing; utilities; maintenance on anything you operate, occupy, and own; entertainment, annual gifting, changing vehicles every five years, and so forth.

What's Wanted

This prong is what you want to do during retirement. You've worked your entire life. Now, you get to do the things you've always dreamed of doing, but never had time to do. For some, that might be spending endless days in the garden or staying home and caring for grandchildren. However, many dream of more expensive ways to spend their time, such as traveling. Either way, you must plan and budget for whatever you want to do. Keep in mind that even relatively inexpensive activities, such as bingo games or golf fees, can add up over time. So, budget wisely.

What Could Happen

This prong doesn't necessarily mean the stock market crashing. Most often what could happen comes in the form of a series of events that might occur in the future. This can be anything from funeral costs or travel costs due to an unexpected death in the family to inflation taking a chunk out of your retirement income. There are also the serious and minor catastrophes that will inevitably occur, just as they did before retirement. In other words, if the air conditioner goes out or lightening strikes all your electronics, then you'll most likely want to replace these items.

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Further Reading
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