For a couple approaching retirement, few things are more meaningful than knowing how much income they will need to maintain financial stability and live comfortably after they stop working. Budgeting for retirement involves estimating your post-retirement income and calculating your essential and discretionary expenses. This approach helps you avoid financial pitfalls and increases the chances that your golden years will be enjoyable and worry-free. Here are practical, step-by-step instructions for creating an effective retirement budget. Discuss your situation and goals with a financial advisor will allow you to create a viable plan for a comfortable retirement.
Estimate your income
While budgeting always involves some uncertainty, a hard and fast rule is that your post-retirement spending plan it should not exceed your post-retirement income. For most couples, Social Security will be an important part of this recipe. Many will also have investment income and, less commonly, corporate or public pension benefits, annuities It is part-time job. Estimating income can be quite simple, as shown in this example:
In 2023, the average retired worker received about $1,800 a month in Social Security retirement benefits. For a couple with similar earning histories, that makes a total of $3,600 per month or $43,200 per year.
O average retirement savings for a person about to retire it is approximately $225,000, the equivalent of a combined $450,000 for a couple who saved equally. Following the conservative rule and withdrawing 4% per year will provide this couple with another $1,500 monthly or $18,000 per year.
Combining these two sources of income gives this average couple a total of $5,100 per month or $61,200 in retirement income per year. Both amounts will be adjusted annually to reflect inflation and Social Security benefits will last a lifetime, while your investment portfolio can be expected to sustain withdrawals for about 30 years or more.
Estimate your expenses
Now let’s turn our attention to expenses. The most accurate way to do this is to observe your own spending patterns as you approach retirement.
Start with housing, which is the biggest single expense for most people and probably accounts for a third of the total. Add up last year’s total expenses for rent, if you’re a renter or mortgage principal, and interest, if you own your home but still have a loan. Also include insurance premiums, property taxes, maintenance and homeowners association fees.
Food is generally the second largest spending category for retirees. Include grocery bills as well as costs for dining out and delivery of prepared meals. Other important types of retirement expenses include health care, utilities, transportation, and discretionary expenses for travel, entertainment, and the like.
You can make this task much faster, easier and more accurate if you use a online personal finance tool which tracks your spending and helps you create a budget. Otherwise, get your totals information from bank and credit card statements, mortgage statements, leases, and other records.
If your recent expenses total less than your anticipated retirement income, this gives you confidence that you will be financially secure after you stop working. Otherwise, you may need to reduce expenses or increase revenue.
The most effective way to reduce expenses is to downsize to a smaller home and perhaps also move to a less expensive area. You can increase income by delaying retirement, which allows you to save more and also increases your Social Security benefit, or by working part time. Paying off debt, especially mortgages, can also reduce costs.
A financial advisor can help you map out your budget and retirement income. Find a financial advisor today.
Two examples of retirement
Let’s see how this would work for two hypothetical couples. One will be for the average income described above and the other example will be for a higher income couple. The values are close to the 2022 percentages survey of real retiree spending by the Employee Benefit and Research Institute:
For $5,100 per month, here’s what a retirement budget would look like:
That total comes to $5,000. While this is less than the $5,100 of budgeted revenue, it does not take into account the unexpected. This couple would do well to consider cost-cutting, perhaps through reducing or reducing discretionary expenses, so that their budgeted expenses fall even further below their budgeted income.
Another hypothetical couple has an income of $100,000 due to higher Social Security benefits, a larger investment portfolio, and generous corporate pensions. Your expenses are likely to be divided similarly in terms of percentages, producing a budget that looks like this:
That total comes to $8,000 per month. Again, this is slightly below the expected monthly income of $8,333. Like the first, this couple would also do well to consider adjusting expenses or income to provide a cushion.
Retirement Estimation Limitations
These are hypothetical examples and a real couple’s experience could be very different. EBRI found that most individual retirees spend less than $2,000 a month, for example. Black, Hispanic and low-income retirees are more likely to be squeezed than others, EBRI also found. Finally, asset management firm BlackRock searched retirees of all income levels and found that 80% were not using their savings and that the savings of almost a third of those who had already retired were still growing. Your mileage, as the saying goes, may vary. Consider discussing your retirement strategy with a financial advisor if you have questions.
Conclusion
Develop an idea of what will be a good retirement income can help you plan effectively and ensure you can comfortably cover your basic expenses. Averages and rules of thumb can help you get started, but individual circumstances vary so much that the smartest way is to gather your own information and generate a personalized plan that reflects your personal situation. By carefully evaluating your post-retirement income, identifying essential and discretionary expenses, and making necessary adjustments, you can help secure your long-term income. financial security.
Retirement Tips
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A financial advisor can provide personalized strategies and expert insights to help you navigate complex aspects of retirement planning, such as income projections, tax implications, and investment management. SmartAsset Free Tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory call with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Social Security benefits represent an important source of retirement income for most retirees. SmartAsset Social Security Calculator you’ll know how much you can expect to receive using your income and your planned retirement date.
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Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid – in an account that isn’t at risk of significant fluctuations like the stock market. The downside is that the value of liquid money can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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