We spend our lives dreaming about retirement. But one big question gets at the heart of so much retirement planning: how much money will you actually have when you’ve stopped working?
That’s because retirement often gives you more time to do things that cost money – with less income to cover the costs. For example, the most common retirement goal – shared among 70% of American workers – is traveling the world.
By planning your finances, you can create and stick to a retirement budget that can make your money go the distance. And you’ll have less stress, too.
Seven steps to retirement planning
With just seven steps, you can learn how to start your retirement budgeting today.
- Take a look at your housing. When planning for retirement, one of the big decisions you may have to make is where to live. Will you stay in your current home or will you move? Do you want to move closer to family or to a convenient location, closer to town? Another thing to consider is the cost of your home.
Housing costs – including rent, mortgage, insurance, maintenance, and property taxes – should use up no more than 15% of your total monthly budget. If you’re close to or over that mark, consider downsizing.
- Examine current bills carefully. Check your credit card bill closely to see if you’re paying for services you no longer need. These could include streaming services, cable, subscriptions, gym memberships, shopping clubs, and credit card fees. You can also determine what types of credit card purchases cost the most. If eating out at restaurants makes up a large portion of your credit card, you may want to start cooking meals at home more.
- Remember taxes. Social security and many other pensions are classed as income, which means they’re taxable. This also applies to your other retirement savings accounts, like IRAs and 401(k) accounts. You don’t pay taxes when you deposit the money or while the money is growing. However, you will pay taxes on 100% of the money you withdraw from this bucket. Once you turn 70½, you must withdraw according to the IRS. These taxes should be added to your budget to avoid surprise payments.
- Save for the unexpected. Unbudgeted expenses can sometimes break the bank. Set aside a monthly sum of money reserved for things like unexpected car repairs and replacements, broken appliances, and other emergencies that aren’t part of your normal monthly budget.
- Don’t forget about health care and dental. While Medicare kicks in at age 65, it won’t pay for everything. Look into insurance plans that will provide extra coverage, and factor in those payments to your budget. And remember, as you get older medical costs are likely to go up.1
- Let the kids know you’re on a budget. In today’s economy, 1 in 5 adults from age 20-30 live with their parents, and 60% of them receive financial help. Subsidizing grown-up children, while it may feel right, can become a serious drain on a fixed income. If your retirement budget can’t support your child, explain your new status and prepare them to be more independent. It’s a tough conversation, but one that will reduce stress for everyone.
Save money where you couldn’t before. If you’re used to grabbing food on the go, try cooking more meals at home. Take advantage of your free time by traveling when it’s cheapest instead of at peak times. And pay closer attention to when the things you need are on sale. You may have more flexibility as a retiree, and a little extra foresight will greatly assist your retirement planning.
Retirement budgeting is a great way to help you live within your means while living the retirement you’ve been planning for all these years. Once you’ve arrived at a budget you can live with, enjoy your retirement. You’ve earned it.