Budgeting for RetirementBudgeting for Retirement

Budgeting for retirement is an important topic those nearing retirement age need to consider. According to the Bureau of Labor and Statistics the average American age 65 or older will spend close to $60,087 a year. In this article, we will go over some basics regarding budgeting for retirement to help you prepare.

Typical Retirement Expenses

When budgeting for retirement, it is important to anticipate typical retirement expenses. The biggest expense for most people is housing and utilities. On average, the typical 65+ retiree will pay $21,445 in this category. However, if you are going to pay off your mortgage this amount will lessen. On the other hand, if you rent you need to allocate funds for rent increases. The second largest category is transportation. This includes the cost of new cars, vehicle maintenance, fuel, and insurance. This comes in at about $9,033 a year. Third, you need to factor in the cost of healthcare. Depending on your personal health this may be a smaller or larger amount. Health care expenses can include premiums, supplemental insurance, out of pocket costs, prescriptions, and medical devices.

You also need to factor in the type of lifestyle you would like to lead. You will need to save more if you plan to travel, you want to eat out a lot, or keep up with hobbies. Next is food. Groceries come in at an average of $4,973 a year and eating out is $2,741 a year. Another large expense you need to plan for is long-term care. This can come in at a whopping $66,126 a year. Unfortunately, Medicare will not help cover this cost. Instead, you must decide if you are going to pay out of pocket or purchase long term care insurance. Lastly, you need to have emergency funds for unexpected expenses. This should be a minimum of $15,000-$30,000.

Rules to Govern Saving and Spending

There are a few general rules regarding saving and spending that you should take into account while budgeting for retirement. These rules include:

  • You will need to be able to spend 80% of your preretirement income. This amount may be higher based on the lifestyle you want during retirement.
  • Each year you should not withdraw more than 4% of your total savings. This will allow your savings to last for 30 years and adjust for inflation. For example, if you have $1 million saved you could withdraw $40,000 the first year. Then the next year you will increase by 3% for inflation withdrawing a total of $41,200.
  • The rule of 72 helps to calculate compound interest. You need to divide 72 by the expected annual rate of return on your investments. This will give you the number of years it will take to double your original advances. This does not take into account additional contributions. You can also reverse this calculation to calculate the rate of return you would need to double your investment over a specified period of time.

5 Steps to Build Your Budget

  1. Examine your current and potential future expenses. This could include travel, hobbies, social activities, and medical expenses.
  2. Find small ways to save. If you are empty nesters, you may consider downsizing your house. If you both no longer work, you may want to go down to one car. You may also choose to eat out less and cancel unused subscriptions.
  3. Create a retirement paycheck. You need to regulate a consistent flow of money each month. This can be a combination of part time work, social security, retirement accounts, investment accounts, and savings.
  4. Assess your tax strategy. When you begin withdrawing from retirement accounts you will owe taxes on those funds. You need to prepare for this, so you are not surprised by a large tax bill at the end of the year.
  5. Review your plan regularly. As time goes on your needs and lifestyle will change. Periodically review your budget and adjust according to your needs.

Successfully Budgeting for Retirement

By taking the correct steps, you can find yourself successfully budgeting for retirement. But you may not feel confident planning on your own. If this is the case, you will want to meet with a Certified Financial Planner. They can run reports and provide a comprehensive and personal retirement plan.

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