2.1 Your budget
Following the guidance provided in the previous section you can now start to forecast your spending in retirement.
To help you estimate your spending, there’s a detailed budget grid below that you can complete either online or by downloading and printing it out. This has a column for your current annual spending and one for your forecasted spending in retirement. There’s an extra column for your monthly and weekly spending if you’re using this method to scale up to your current annual spending.
The budget grid separates spending that is ‘essential’ (e.g. food) and that which is ‘discretionary’ (e.g. leisure activities). This distinction can sometimes be difficult to make – for example, for many people gym membership is essential to help maintain good physical and mental health in later life. However, making the distinction can help if you need to make economies as, by its nature, you usually have more control over discretionary spending than you have over essential spending.
Your spending pattern will change in retirement
Some spending items are likely to change in retirement – perhaps your mortgage will be fully paid off by the time you retire? Some travel costs may go down if you have a long commute to work. If in doubt, overestimate your spending needs – it’s always better to find you are spending less than expected rather than more.
Don’t forget to include the cost of repaying any debts – for example car finance agreements and bank loans. Many people use the tax-free lump sum from their pension pot to clear these debts as they go into retirement.
As you complete the grid you might want to use the exercise to see if you can reduce some of your spending costs – for example by switching utility suppliers or cancelling club memberships that you don’t really use. A regular review of your expenditure makes good financial sense.
Make a start now and then you can return to your budget later to refine and finalise it. Once completed, you’ll have the target level for the disposable (after-tax) retirement income you’ll need.
Activity 1 Your retirement spending forecast
Complete the table below.
Select the link below to view the interactive table. Open it in a new tab or window so you can easily find your way back to the course.
Alternatively, use this Word version of the table: Budget grid [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)]
The more you look at your spending, the more accurate you will be in judging the money you will need in retirement. When it comes to your pension, start by looking at how much the government will provide.
