Anticipate increases in certain areas
As you’re looking for expenses you can reduce or eliminate altogether, you should also be factoring in those expenses that are likely to increase, health care being one of them. The BLS figures show that while annual spending decreases to $48,885 for Americans aged 65 to 74, the amount they spend on health care rises by 4%. By the time they reach age 75, health care accounts for almost 16% of their annual budget.
According to HVS Financial, a 65-year-old couple can expect to spend $266,589 out of pocket on health care alone in retirement, even with Medicare Parts B and D and a supplemental insurance policy. Allocating extra room in your budget for those expenses is a must, even if you’re in good health now.
Estimate your income
Knowing how much money you’ll have to cover your expenses is the other half of making a retirement budget. Look at all of your income sources, such as a 401(k), IRA, pension, taxable investment accounts or a Health Savings Account. Add up the total balances for each account to determine how much you can reasonably afford to withdraw each month.
If you’re not sure where to start, you can use the 4% rule as a guideline. This rule dictates that if you withdraw 4% of your retirement savings the first year, then adjust your withdrawals for inflation annually you should have enough money to last for 30 years. So if you have $1 million saved across all of your accounts, you’d be able to withdraw $40,000 the first year, which breaks down to $3,333 a month.
That doesn’t include Social Security, which you’d also need to factor in if you’re planning to start drawing benefits right away. Once you know what your monthly baseline is, you can compare that to what you expect to spend in retirement. If you’re still coming up short after making cuts, that’s a sign that your budget needs a little more tweaking.
The bottom line
Your budget can make or break your retirement experience and the sooner you start planning yours, the easier the transition will be. Making a budget you can live with is ultimately a matter of being realistic about your expectations, spending and income so that you can find a reasonable balance between the three.