These days, many people wonder if they will ever reach retirement. But unless you plan on staying at your current job until you simply expire at your desk, all of us will get there eventually. What matters now is getting your financial house in order to make the most of your Golden Years. You need a retirement budget.
This process starts with looking at your retirement income and potential retirement expenses to determine your financial situation as long as possible before you retire. Once you understand the gap between the retirement resources you have and what you want to have, you can begin to adjust spending, savings, and in some cases, your expectations. Instead of wondering if you can afford retirement, we want to help you learn how you can.
How Do You Picture Your Retirement?
You and your spouse have probably already thought about how you would like to live during retirement. Maybe you’re looking forward to having more free time to travel, see your grandchildren, work on hobbies, or even start a small business.
Sadly, you probably belong to the majority of people who wonder if you will ever get to realize these goals. A recent AARP survey found that most adults over 35 don’t believe they will retire at 65, the once-traditional retirement age. They don’t believe that they can save a large enough nest egg to cover health care and other monthly expenses.
Certainly, people should have concerns over rising costs of health insurance, food, and shelter. But none of these things make retirement impossible. If you want to retire comfortably, make plans now.
What Should You Know to Plan Your Retirement?
First, no two people have the same definition of an ideal retirement lifestyle. You should first define some realistic expectations that might include your anticipated frequency of travel, type of home, and the cost of travel or hobbies that you should have more free time to enjoy. Once you have considered your expectations for retirement, you can then estimate your retirement budget.
Setting a Retirement Budget
You may have already heard the rule of thumb that you should have 70 to 80 percent of your working income in order to cover monthly expenses during retirement. Actually, individual requirements for retirement income can vary wildly.
- You may decide to downsize into less expensive housing, keep your car longer because you won’t commute, and have time to attend to some tasks that you used to pay somebody else to do.
- On the other hand, you may need to budget for increased travel or for higher health expenses related to age-related infirmities or long-term care insurance.
How long much your retirement plan extend? While nobody can predict how long they will live, you should consider planning for a life expectancy of at least 95 years. According to the Social Security Administration, at least one-quarter of today’s 65-year-old men or women can expect to reach 90, and at least 10 percent of them will get to celebrate their 95th birthday. Few people regret making plans to enjoy a long retirement.
How to Get Started With Your Retirement Budget
Start your budget by reviewing your current finances and by planning your fixed monthly retirement expenses for essentials, like food, utilities, and shelter. Also consider some kinds of retirement protection that you may need, like long-term care insurance or an alternative way to plan for nursing homes or assisted living. If you’ve already used up your retirement income on the essentials before you even gotten to the luxuries, you may want to consider ways to change the way you spend money on the basics.
Don’t Forget About Inflation
Also, don’t forget to account for inflation. When you read that U.S. inflation averages over three percent a year, that probably doesn’t alarm you. However, if you stop to think this equates to prices doubling almost every two decades, you may grow concerned about rising costs eating into your fixed income. Technology has lowered the prices of some things, like computers, in the last couple of decades, but it certainly hasn’t reduced the price of phone bills, rent, or medical care. The main thing you can do to protect yourself against inflation is to set a realistic budget and to try to keep some of your money still working for you to earn income even after you retiree.
Realistically Estimate Your Retirement Income
While everybody has different sources of retirement income, these are common:
- Social Security Retirement: You and your spouse’s decision to take Social Security early, on time, or late may impact your income. Once you do take it, assume that you will get paid a relatively fixed amount. You can use this Social Security Income Calculator to get an estimate.
- Work pensions: Some companies may pay pensions to the employee and a surviving spouse. Sadly, employee retirement pensions are not as common as they used to be.
- Investment or savings income: Some examples of income from your savings might include proceeds from sales of assets, retirement annuities, or interest. You should figure out how much you can save by retirement, based upon your contributions, average returns, and risk profile. Don’t forget to factor in withdrawals you will make upon retirement.
- Additional income sources: These days, many retirees consider renting out a room in their home, working intermittently or part-time, or even turning a hobby into a part-time business to supplement their regular retirement income.
Get Your Retirement Income to Match Your Expenses
Did you complete the tasks above and find that your anticipated retirement budget won’t allow you to enjoy the kind of retirement that you imagined? Very few people can match their goals and income up on the first try, but that doesn’t mean that you should give up. The sooner that you estimate monthly expenses and income during retirement, the sooner you can begin to make adjustments that will help you reach your goals.
Adjust the Way You Save and Spend Money
Since you may have more control over your spending than other aspects of your financial situation, you could consider making these changes as early as possible:
- Try to reduce high-interest debt as quickly as possible because your debt payments will eat into your savings and income.
- You may want to get your house paid off before retirement; but again, work on the high-interest debt first.
- Prioritize retirement planning, even if it means you have to limit gifts or risky loans to your children and other family members.
- Consider downsizing your living arrangements if a move could save you money.
- Look into other cities with lower costs, particularly medical costs, that might help you stretch your budget during or even before you retire.
Sometimes, You Just Need More Income
Very often, you may find that even if you change the way you spend money, you will still need more income to enjoy a comfortable retirement. Some adjustments to your income that you might make include:
- Decide when you will take your social security benefit to maximize potential income. Our previous article, “When to Take Social Security,” should help.
- You may decide that delaying retirement, taking a part-time job after retirement, or other ways to earn income can help bridge the gap between what you have and what you want.
Get Help Developing the Best Retirement Plan
Eventually, you want and need to retire. Because you should expect to spend decades in retirement, you may find retirement planning very difficult. You can’t predict the future, and even if you could, you may still have trouble figuring out how to generate enough income to cover expenses for decades.
An experienced retirement planner will help evaluate your current financial situation, define retirement goals, and provide direction. At Magellan Financial., we’re here to help. You can take the first step towards your comfortable retirement by emailing us today. Once you tell us a little bit about yourself, we’ll tell you how people just like you achieved their goals.