Retirement should be a time to relax and enjoy your golden years. But it's equally important for seniors to carefully manage their finances. Budgeting for seniors is about balancing enjoyment with the need to conservatively manage limited funds.

Everyone knows that the most accurate approach to budgeting is to carefully track and manage every dollar that is spent each month. But in reality, many seniors are put off by this rigorous approach and never set up a budget at all. If you are one of these budget-averse individuals, percentage budgeting can be a good first step towards taking control of your retirement spending.

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In order to set up a percentage budget, it is necessary to identify some of the main factors driving expenses for seniors. Toward this end, this life stage can be broken down into two main components: the transition to retirement and later retirement

Transitioning to Retirement
The consensus view is that spending usually declines in the early years of retirement. It is often estimated that, seniors will need only about 70-80% of the income they had been making in their working life.

This drop in expenses occurs for three main reasons. First, seniors generally no longer need to save for retirement, so they can cross that item off their budget. Second, seniors often fall into a lower tax bracket upon retiring and thus see a smaller percentage go to taxes. Finally, seniors usually no longer have child care expenses, have paid off their mortgages and no longer have job-related expenses such as commuting costs.

On the other hand, seniors need to consider whether having more free time would prompt them to spend more money on things like entertainment or travel. It is smart to account for some increase in these expenses, especially if you already know that you have big travel plans or expensive hobbies. (For more, see Journey Through The 6 Stages Of Retirement.)

Later Retirement
After the initial drop in expenses, most seniors settle in to a retirement routine and probably have a pretty good idea of what their expenses are. The conventional thinking here is that most seniors' expenses stay pretty constant and just increase with inflation.

There are two competing factors at work here. Medical expenses are likely to increase significantly as seniors get older. But, a balancing factor for these medical expense increases is that seniors tend to spend less in other areas if their health declines and the pace of life must slow down. The consensus is that it's best to be very conservative in planning for an increase in medical expenses since there is a lot of variability in medical costs, and they can become very high. (You may not be able to prevent illness, but it doesn't have to infect your savings. Learn how in Failing Health Could Drain Your Retirement Savings.)

A Percentage Budget for Seniors
A popular method of percentage budgeting says that you should allocate only 60% of your income to your non-discretionary expenses. The remaining 40% can then be invested into retirement savings, other savings and used as fun money.

For seniors, several adjustments should be made to this approach. First, seniors need to work with a financial planner to determine what a sustainable level of income is for them in retirement. Second, 10% savings for retirement can be eliminated as a budget item. Third, a senior probably does not need to allocate as much for long-term savings because major life purchases, such as a house or a child's college education, have most likely passed. (Learn more in 7 Expenses You Can Ditch In Retirement.)

Medical Preparation
As discussed above, as seniors get older, their medical expenses often increase greatly. While it's hard to say how much medical expenses will be, one study indicates that seniors spend an average of 19% of their income on medical expenses, and the Pierce County, Washington Human Services website gives 20% as a rough estimate for seniors' budgeting purposes. The percentages ranged from approximately 10% to over 30%.

Considering these factors, a percentage budget for seniors would allow for a slightly greater proportion of non-discretionary expenses since the retirement savings and long-term savings are no longer a necessity. A budget for seniors would also take into account the need to budget for unexpected medical expenses.

An equivalent guideline for seniors would be to have, at maximum, 70% of income covering all non-discretionary expenses. This allows space for 10% fun money, 10% short-term savings and a 10% allowance for unexpected out-of-pocket medical expenses. As always, it's better if you can keep your non-discretionary expenses lower, because this gives a greater measure of flexibility and security. (For more, check out Stretch Your Retirement Budget.)

Pitfalls of Percentage Budgeting
A percentile budget should be thought of a very rough method of managing your finances. It can work well as a starting point, but it does not consider many of the unique situations that each person will have. Probably the most important thing to take note of is that a percentile budget does not work well for people with low incomes. Certain items, such as medical expenses, are necessities that are fixed in price, and thus will consume a much larger percentage of income for low-income seniors.

The Bottom Line
For budget-adverse seniors, percentage budgeting can provide a good first step toward managing their finances. The most important things to keep in mind are to keep non-discretionary spending low and to make sure to leave enough leeway for potential increases in expenses, especially medical care.

Catch up on the latest financial news in Water Cooler Finance: The iPhone Launch, Buffett's Lunch And BP's Lashing.

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