When you’re ready to retire, you need a plan for making your savings last. That’s where a well-thought out budget comes in handy. Without a detailed plan for spending and saving, you run the risk of depleting your nest egg ahead of schedule If retirement is on the horizon, here are some tips for creating a budget you can live with in your golden years.
Evaluate your current spending
The first step in establishing your retirement budget is looking at where your money’s going now. According to the Bureau of Labor Statistics, total annual expenditures for seniors aged 55 to 64 came to $56,267 annually as of 2014. Housing is the largest expense, accounting for 32% of that number.
If you’re still a few years away from retirement, you should be looking at how your spending adds up in terms of things like housing, food, transportation, health care and debt payments. Once you have an idea of what’s going out each month, the next step is to focus on what you can reduce.
For example, if you’re still paying on credit cards or student loans, wiping those debts out should be a priority. Then, you could focus on paying down your mortgage or even downsizing your home altogether to streamline the amount you’re spending on housing. The point is to trim the fat wherever possible to minimize what you need to cover your basic expenses in retirement.
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.