One of the biggest questions people have about retirement is, "How much money do I need to retire comfortably?" We can help you figure that out with our tips on creating a personalized retirement budget. Just compare how much money you'll have coming in to what you can expect to spend. Let's get to planning so you can enjoy your golden years worry-free!
[Edit]Steps
[Edit]Calculating Your Retirement Expenses
- Current expenses: Look over your bank or credit card statements for the last 6-12 months and write down everything you spent money on. Break down each expense into categories so you can really understand how you're spending your money—and whether you expect those expenses to change when you retire. We have examples of these categories in the following step.[1]
- Some of your expenses will go down once you retire, like work-related travel or professional clothing.[2]
- Also, if you pay off your mortgage before you retire, you can eliminate that monthly expense.[3]
- On the other hand, some of your costs will likely go up, like the money you spend on travel, hobbies, or entertainment.
- In general, retirees spend about 70-90% of their pre-retirement earnings each month to maintain their standard of living.[4]
- Utilities and Mortgage or Rent: Include things like your water, gas, garbage pickup, and electric bills in this category. If you're paying rent or a mortgage, include that as well. For the most part, expect these basic household bills to cost about the same as they do now—costs like your insurance, car payment, and water bills aren't likely to change much.[5]
- Of course, there are exceptions. Your power bill might go up a little if you'll be home more often, for instance, or your car-related expenses might go down if you're not driving as far each day.
- Your rent or mortgage and utilities can vary a lot depending on things like where you live and the size of your home. That's why it's helpful to look at what you're currently spending for those bills.
- Living costs: In this category, write down what you spend on the things you need for day-to-day living. This includes your groceries, gas and transportation costs, car and home maintenance, and clothing.[6]
- If you find yourself needing to cut spending, this is sometimes an area where you can scale back a little. For instance, you might save on groceries by buying meat in bulk and freezing it for later.
- On average, retirees spend just around $480 on food and about $560 on transportation.[7]
- Be realistic about your needs. Things like shoes, clothing, and food are essential, and if you budget too conservatively, you could find yourself overspending.
- Medical care: It's estimated that the average retired person will spend nearly $150,000 in out-of-pocket medical expenses over the course of their retirement. That doesn't even include long-term care. That number might seem daunting, but if you build it into your budget from the start, you'll feel more confident about being able to afford the healthcare you need.[8]
- If you retire before you turn 65, plan to pay for health insurance until you're old enough for Medicare.[9]
- Even once you do have Medicare, things like dental and vision care will likely still be out-of-pocket.
- Hobbies, travel, & entertainment: Now comes the fun part! Look at what you're already spending on things like your cable bill, movies and plays, dining out, and going on trips. If you have more time on your hands, it's likely that you'll want to do these things at least as often as you do now, so be sure to make room for them in your budget.[10]
- Remember to include things like memberships and subscriptions. If you plan to take up a hobby like golf, factor the costs for that into your budget as well.
- Retirees usually spend around $200 a month on entertainment.[11]
- This is an area you can cut back on if you're struggling to make ends meet, but try to include at least a little discretionary spending—you've worked hard and you deserve to enjoy your retirement!
- Quarterly, bi-annual, and annual expenses: As you're looking over your current expenses, keep an eye out for any expenses that you only pay every so often, like once a quarter or twice a year. This could include things like your auto registration, property or state taxes, home and car insurance, or a home warranty.[12]
- Also, plan ahead for one-time expenses you might have, like wedding or graduation gifts or buying a new car.
- Inflation: Plan for inflation to add about 3% to all of your expenses every year. That might not be a very big change from one year to the next, but over the course of a couple of decades, it could be a big jump.[13]
- Social Security payments rise a little each year to account for inflation, but they're not guaranteed to keep up with actual inflation costs.
- Emergency fund: Have about 6 months' worth of living expenses set aside just in case of a costly emergency. It's best if this is in a separate account so you can draw from it without affecting the rest of your budget.[14]
- For instance, if you have unexpected medical costs or you need home or auto repairs, you'll have the peace of mind that you can pay for that.
- Some financial experts say to budget about $200-$300 a month for unexpected big-ticket costs.[15]
- If you have to use your emergency fund, plan to cut back on some of your planned monthly spending until it's replenished.
[Edit]Estimating Your Retirement Income
- Savings and investments: If you've been planning for retirement, you've probably saved money in a savings or investment account, like an IRA, 401(k), or 403(b).[16] Financial experts recommend using about 3-4% of your total investment portfolio during the first year of your retirement. If you stick to that amount, you'll be able to draw that same amount of money out each year for 25 years.[17]
- For instance, if you have $1 million in your retirement account, you can draw out $40,000 a year for 25 years.
- If you find that 4% a year doesn't cover your living expenses, you can always adjust your withdrawal rate later on. Just keep in mind that if you draw out more money now, you won't have as much for the later years of your retirement.
- Social Security: Social Security provides you with a regular monthly income. The amount you'll receive depends on a lot of factors, including how much you earned while you were working, how long you worked, and the age you are when you retire.[18]
- Although you can start drawing your retirement when you turn 62, you'll get more money each month if you wait until your full retirement age, or 65.[19]
- If you wait to draw Social Security until you turn 70, you'll receive even more money each month.
- In 2021, the average monthly Social Security payment is around $1500.[20] For an estimate of how much you'll draw, use the Social Security Administration's online calculator: https://www.ssa.gov/OACT/quickcalc/.
- Passive income: Add any additional sources of income when you retire, like a pension or an annuity that you might get from your employer. Also consider any other types of income, like rental properties, a return on business investments, or royalties.[21]
- Payments like pensions and annuities are often paid monthly, although they'll sometimes be paid out once a quarter, every 6 months, or annually.
- Part time work. Retirement doesn't always mean you have to leave the workforce completely. Part time work is a great way to stretch your savings by bringing in a little income—and if you're the type who gets bored easily, it can help you fill up your time once you're no longer working full time.[22]
- Try doing something you've always wanted to do, like starting your own consulting business or teaching art classes. This is your time to follow your dreams!
- Other good jobs for retirees include babysitting, tutoring, bookkeeping, retail, and office management.[23]
[Edit]Tips
- To maintain your standard of living, plan to spend about 70-90% of what you live on now.[24]
- Once you make your retirement budget, try living on it for several months before you actually retire to make sure it works for you.[25]
- If your expenses will exceed your income, consider waiting a little longer before you retire so you'll have time to save more.[26]
- After you retire, evaluate your budget each year and make any changes as needed.[27]
- For detailed advice that's specific to your situation, talk to a financial advisor you trust.
[Edit]References
- ↑ https://www.kiplinger.com/slideshow/retirement/t047-s002-make-sure-you-have-enough-money-in-retirement/index.html
- ↑ https://psu.instructure.com/courses/1806581/pages/chapter-5-how-to-forecast-a-retirement-budget
- ↑ https://www.cnbc.com/guide/retirement-planning/
- ↑ https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/top-10-ways-to-prepare-for-retirement.pdf
- ↑ https://www.cnbc.com/guide/retirement-planning/
- ↑ https://www.cnbc.com/guide/retirement-planning/
- ↑ https://www.marketwatch.com/story/reality-check-what-the-average-retiree-spends-a-month-2018-06-05
- ↑ https://www.cnbc.com/guide/retirement-planning/
- ↑ https://www.kiplinger.com/slideshow/retirement/t047-s002-make-sure-you-have-enough-money-in-retirement/index.html
- ↑ https://www.cnbc.com/guide/retirement-planning/
- ↑ https://www.marketwatch.com/story/reality-check-what-the-average-retiree-spends-a-month-2018-06-05
- ↑ https://www.kiplinger.com/slideshow/retirement/t047-s002-make-sure-you-have-enough-money-in-retirement/index.html
- ↑ https://www.cnbc.com/guide/retirement-planning/
- ↑ https://www.aarp.org/work/social-security/info-05-2011/10-steps-to-retire-every-day.html
- ↑ https://www.kiplinger.com/slideshow/retirement/t047-s002-make-sure-you-have-enough-money-in-retirement/index.html
- ↑ https://www.msrs.state.mn.us/create-a-budget
- ↑ https://www.kiplinger.com/slideshow/retirement/t047-s002-make-sure-you-have-enough-money-in-retirement/index.html
- ↑ https://www.aarp.org/work/social-security/info-05-2011/10-steps-to-retire-every-day.html
- ↑ https://www.ssa.gov/benefits/retirement/planner/agereduction.html
- ↑ https://www.aarp.org/retirement/social-security/questions-answers/how-much-social-security-will-i-get.html
- ↑ https://www.cnbc.com/guide/retirement-planning/
- ↑ https://www.aarp.org/work/social-security/info-05-2011/10-steps-to-retire-every-day.html
- ↑ https://www.aarp.org/work/job-search/info-2020/part-time-jobs-for-retirees.html
- ↑ https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/top-10-ways-to-prepare-for-retirement.pdf
- ↑ https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/top-10-ways-to-prepare-for-retirement.pdf
- ↑ https://www.kiplinger.com/slideshow/retirement/t047-s002-make-sure-you-have-enough-money-in-retirement/index.html
- ↑ https://www.aarp.org/work/social-security/info-05-2011/10-steps-to-retire-every-day.html
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