Retirement is both an exhilarating prospect and a pretty scary one. After years spent in a working life, it is hard to accurately predict how much money will be needed in retirement and, concurrently, how to get there. No matter where you are in your life, it’s critical to begin budgeting for retirement today.
The rule of thumb for retirement savings suggests that retirees will need 70-80% of their working income to live in retirement.
An example would be that someone making $100,000 in their working life, would need $70,000-$80,000 a year for a comfortable retirement. The 70-80% rule is an excellent starting point, but budgeting for retirement is not a one-sized fit all strategy, and relying on the 70-80% rule does not guarantee success.
Figuring Out Your Retirement Budget
You don’t want to wait until you retire to figure out how much you need to be budgeting for retirement. The decade before retirement is when the clearest picture about retirement needs comes into focus and when most of the final preparations begin to happen.
During this preparatory period, the first step in creating a retirement budget that actually works is to figure out how much money you expect to have to pay your monthly bills. This amount includes any pensions, Social Security income, and any monthly withdrawals you plan to make from retirement accounts such as, but not limited to 401(k)s, 403(b)s, Traditional and Roth IRAs. It is imperative to also consider any tax consequences associated with these retirement accounts because they can significantly impact your financial picture in retirement.
After figuring out how much money is coming in every month during retirement, the next step is figuring out how much money is going out.
Maybe you already have this calculated or maybe you really have no idea where your money is going because there is plenty of it to go around while you are working. Whether you fall into the former or latter category, try keeping track of all of your expenses without changing your standard of living for three months. Starting with the average monthly expense for those three months will give you a jumping-off point for how much you will need and if you are honoring a budget that you already have.
What you spend on a month-to-month basis is not the only thing you have to account for in your retirement budget. Don’t forget to leave money in your budget for expenses like vacations, home repairs, vehicle repairs, and emergencies. They can bust your retirement budget if you do not plan for them. Saving for those events could mean setting a lump sum aside or planning for a monthly contribution to a fund for those expenses.
The next step when budgeting for retirement is to make a rough budget considering both your fixed expenses like mortgages and car payments as well as variable expenses like groceries. Using a three-month rolling average is a great reference point for estimating these expenses. Once you lay it all out on paper, you will have a better idea of what is going out and where, if anywhere, you can cut back. Revisiting this budget annually at a minimum will help you to stay on top of your spending and what to expect as you move into retirement.
What If I Don’t Think I Will Have Enough?
Unfortunately, you are not alone. According to the Economic Policy Institute, less than half of American families have saved any money for retirement. People nearing retirement between 50 and 55 have an average of only $8,000 saved and those between 56 and 61 have a median savings of $17,000. It’s not a catastrophe if you haven’t saved like you wanted to save. There are ways at any age to prepare for retirement regardless of past savings.
For starters, many expenses during working life will carry through to retired life like mortgages, electric bills, and groceries. However, some of your bills will be reduced by leaving the workforce. During retirement, you likely won’t need an expansive professional wardrobe or monthly dry cleaning bills. You might also not need to pay for a bus pass or gas to get you through your 45-minute commute every day. Some people entering retirement also look to downsize from a two-car family to a one-car family to save on that expense.
Using your budget to determine other places you can cut corners in retirement either temporarily or permanently can make you more confident in budgeting for retirement too. The biggest opportunity for reduction in bills usually comes from variable spending like eating out, vacations, and even groceries. However, retirees would be remiss to not take advantage of senior discounts and the discounts that come from shopping around for the best deal. These savings do take a bit of legwork though and that is not something that working people always have time to do.
It is also worth considering what tasks you can start doing for yourself or what tasks you want to pay someone else to do in retirement. With the technological advancements these days, there are more services than ever and they are available at the touch of a button. If you are currently paying someone to do your shopping, doing that yourself in retirement could save some money on tips, delivery fees, and service fees. Even though each time you are using a service you are only spending a couple of dollars, a couple of dollars adds up over time.
Conversely, you might want to start paying someone to do some tasks for you that you have been doing for yourself like mowing your lawn or raking leaves. Whatever you decide, these expenses should be accounted for when doing monthly budgeting for retirement.
Start Budgeting For Retirement Today!
Even if you haven’t saved and you are nearing retirement, it’s never too late. Start Today.
The best place to start is to consider your company’s 401(k) or 403(b) plan. The saying “there is no such thing as free money” applies to most things in life, but not to 401(k) and 403(b)s. Employers often do matches up to a certain amount per year for employees contributing to 401(k)s. These employer matches are rewards for participating in a retirement savings plan and are free money. Ensuring that you contribute enough to participate in the match is a great way to give your retirement savings a boost.
Another way to close the gap between where you want to be and where you are is to make “catch-up” contributions if you are over the age of 50. The government puts caps on allowable contributions since they are incentivizing people to save for retirement. They extend the limits for contributions for those over the age of 50 to allow them to make up for lost time or simply save more as they get closer to retirement. These “catch-up” contributions are allowed in both individual retirement accounts (IRAs) and company-sponsored plans like 403(b) and 401(k) plans.
Automating retirement savings will help you to ensure that you pay yourself first. Almost all employer-sponsored plans can remove the money for your retirement account before it hits your paycheck. Individual IRAs offer automatic transfers to your account too. The idea of ‘if you don’t see it, you can’t spend it’ pays major dividends when budgeting for retirement where retirement savings are concerned.
If you are feeling particularly ambitious, you could even start living on your retirement budget during your working years and save the rest either through various retirement accounts or personal accounts.
Consider Delaying Retirement
If you have run the numbers while budgeting for retirement and it is not feasible to retire when you want to, consider delaying retirement for a few years. It’s not an ideal solution for those who have been looking forward to retirement, but it may still be the right decision. Most people will rely on their Social Security benefits for all or a portion of their retirement budget. However, Social Security monthly income will increase if you delay your retirement just a bit. Just because you reach retirement age according to Social Security does not mean that you have to retire. Delaying retirement a few years can mean as much as a 25-30% increase. Delaying retirement can also give you more time to save.
Even if you do decide to work past the government-sanctioned retirement age, you can still sign up for Medicare at the age of 65. Medicare will, in most cases, greatly reduce your cost of healthcare. Less money spent on healthcare means more money back in the budget for other things.
Whether you think you are prepared for retirement or you know that you are not anywhere close, there are things you can do to prepare yourself now. The most important thing to retirement success is knowing that you are going to be able to meet your basic retirement expenses with the income you can expect. If you haven’t saved for retirement before now, it is time to start budgeting for retirement today. It is never too late and every little bit counts and will impact your quality of life on the other side of your golden years.