As retirement age approaches, it’s important to be financially prepared for what lies ahead. The thought of living on a fixed amount of money during your later years can feel daunting. Setting a realistic retirement budget ensures that you’ll have the funds you need during this time.
Retirement looks different for everyone, and there’s no one-size-fits-all strategy for creating a budget. Ultimately, your retirement budget will depend on a variety of factors unique to your lifestyle. Here’s what to consider when creating a retirement budget.
Current and Future Expenses
The first thing to consider is what your expenses will look like when you retire. Many of your expenses will stay the same as you transition into retirement, but others may increase or decrease depending on your lifestyle changes.
A rule of thumb that many financial professionals use is to save 10-15% of your pre-tax income for retirement each month while you are still working. Experts also recommend aiming to have roughly 80% of your former income saved for each year you’re retired. However, these are just guidelines - you may need to save more or less depending on your pre-tax income and your lifestyle.
For example, things like mortgage, utility, and grocery costs will likely stay the same, especially if you’re staying in the same home in your early retirement years. However, spending on things like transportation and clothing will likely decrease. If you do move to a new location, your expenses could increase or decrease depending on the local cost of living.
Your healthcare costs may also change over time, which is another key factor to consider. Transitioning from an employer-sponsored healthcare plan to a Medicare plan will likely cause a change in your budget. You also may need more frequent healthcare visits or even long-term care as you get older.
On top of this, you may have certain hobbies you want to pursue in retirement, which should also be factored into your long-term planning. However, you may need to cut back on some unnecessary expenses in order to make your retirement funds last.
Sources of Income
Your sources of income are also going to change when you reach retirement age. Instead of having one source of income from a job, you will likely have several sources of income. You may receive Social Security or pension payments each month. If you have a 401(k) or IRA account, you may also have access to those funds.
You may also have passive income from other sources to take into account. For example, many retirees own vacation or rental properties which they can use to make extra money. You’ll want to consider how this income will affect your retirement budget and if it could change over time. For example, you may eventually decide to sell your properties or purchase new ones.
Knowing which forms of income you will have access to is key when determining your retirement budget. If you’re worried about having enough saved for retirement, consider looking for investments that can provide ongoing passive income to maximize your budget.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
