Retirement represents one of life's biggest financial transitions. While you may have decades of experience managing a working income, retirement can bring new challenges. And the difference between a comfortable retirement and one filled with financial stress often comes down to thoughtful budgeting and planning.
Whether retirement is just around the corner or still years away, developing a realistic budget framework now can help ensure your golden years truly shine. Here are five tips to help you create a retirement budget that supports the lifestyle you envision:
1. Know what your monthly income will be
Retirement doesn’t stop your monthly bills, which can include — but aren’t limited to — housing, health care, food, clothing, transportation, entertainment, and travel.
Since your retirement can last 30 or more years, almost as many years as your working years, it’s important that you get a good handle now on what your monthly income will be later on so that you can cover your expenses.
Hopefully, you’ve saved — or are on your way to saving — what you’ll need for retirement. To maintain your lifestyle in retirement, experts recommend aiming to replace 70% to 80% of your pre-retirement income to keep your standard of living during retirement.1 You don’t need a full 100% because Social Security payroll taxes and saving for your 401(k) are not an issue anymore. That means if you currently make $100,000 a year, estimate you’ll need $70,000 to $80,000 annually during your non-working years.
Ideally, you’ll have several sources of income that will meet your needs. One of them is Social Security. Get a personalized estimate of your future payments here . You can start collecting Social Security at age 62. However, every year you delay claiming your Social Security past your full retirement age, you earn additional benefits until age 70.2 Full retirement age (FRA) is between 66 and 67, depending on your birth year. See your FRA here.
Of course, you’ll need more to help supplement those Social Security checks. Consider an investment strategy that incorporates your risk tolerance, objectives, time horizon, and tax situation among other factors. Working with a financial professional can be helpful when considering a long-term investment strategy.
A pension or a fixed annuity can also be part of a retiree’s guaranteed income strategy.*
Retirement savings include, but aren’t limited to, a high-yield savings account, a traditional individual retirement account (IRA), a Roth IRA, a Simple IRA, a traditional 401(k) plan, a Roth 401(k), and a Simplified Employee Pension (SEP) plan.
It’s hard to know how much to withdraw from your nest egg because of the unknowns — the length of retirement, spending needs, and investment returns. And you must account for inflation. It’s wise to work with a financial professional to create a distribution strategy that can be adjusted based on retirement plans and market volatility.
Other considerations when thinking about a paycheck strategy include: tax efficiency (how the money you withdraw will be taxed), required minimum distributions (RMDs) that must be taken from tax-deferred accounts and some tax-free accounts starting at age 73 for people who turn 72 years old on or after January 1, 2023.3 Learn more about RMDs here.
2. Have an emergency fund
Having an emergency fund doesn’t end in retirement. Just like when you are working, you may face unpredictable expenses like health care costs not covered by insurance, home repair or car repair costs. Have money set aside in an emergency fund that’s easily accessible and protected from market volatility and withdrawal fees.
3. Consider unexpected health care costs
An expense that is sure to increase throughout the years is your health care. A new report from Fidelity Investments find that the average 65-year-old retiree will need $172,500 to cover health care and medical expenses through retirement.4 And this doesn’t even include long-term care.
You can prepare for it now by contributing to a health savings account (HSA), as long as you’re not on Medicare and are eligible to contribute by participating in a high-deductible healthcare plan. If you’re under age 55, you can contribute up to $4,300. Those who are 55 and older there is an additional catch-up contribution of $1,000 a year. Distributions are tax-free as long as the money is used for a qualified medical expense.5
During your working years, if you can, let your HSA balance grow and compound over time. It will be a very useful resource to help pay for your medical expenses once you retire. When you turn 65, you can also use it to cover non-healthcare expenses; however, the funds withdrawn would be taxed as income.
4. Consider what will change in retirement
Granted, some of your expenses will decrease in retirement. You won’t need as many business clothes; your commuting expenses will decrease, as may eating out. But some expenses, such as travel, could increase, at least for the early years of your retirement as you explore the world and visit all of the places on your bucket list.
If travel is important to you and you want to do a lot of it, then try to do it when you can get more bang for your buck — look online for deals or visit in the offseason.
5. Create a plan and stick with it
Looking forward to a seven-day weekend for the rest of your life is thrilling — and a little daunting. Make plans now so that it works for you when you reach your destination. Because once you get there, your new life is sure to take you to many more places.
