How to Plan a Retirement Budget
As with so many other questions in life, the answer to this question is, “It depends.” How much you can spend once you reach retirement depends on your retirement income, the state of your health, at what age you retired, and where you live. There are, however, some guidelines you can follow.
Assuming you did the math in your 30s and 40s and created a nest egg that would fund your expected retirement lifestyle, there are some variables that affect your retirement budget.
Social Security
When you claim Social Security makes a big difference to your benefits. If you claim Social Security at age 62, rather than wait until your full retirement age (FRA), you can expect a 30% reduction in monthly benefits. For every year you delay claiming Social Security past your FRA up to age 70, you get an 8% increase in your benefit.
Here are the numbers:
If you collect Social Security at age 62, your monthly benefit will be $2,129. If you wait until full retirement age, or 67, you will receive $3,042, an increase of 43%.
But if you plan on working until you’re 70, your maximum possible benefit will be $3,772 a month, an increase of 77% from what you would get if you started collecting benefits at age 62. So, if you can afford it, waiting would be the better option.
It gives you more years to save and if you are in good health, it makes sense to take your benefits later.
Other Income Sources
Apart from your savings and Social Security, you can plan for alternate sources of income. Many retirees are successfully starting online businesses. Some leverage their hobbies or passions and make income from those.
If you’re Social Security and your retirement savings are not sufficient, this is a route to consider. It can provide a double benefit – it keeps you active and interested, as well as a source of income.
Retirement Budget
If you want to have a realistic number to work with, list out all the expenses you expect to have once retired. This is a very individual thing – some retirees prefer to draw more early in their retirement, while they are younger and still fit. Others prefer to keep as much as possible in the fund so that they don’t run out of money as they grow older.
The budget should cover rent or mortgage payments, utilities, food, travel, gas, insurance, etc. Make a complete and exhaustive list. Compare that to your income and you can work out how much you can spend each month.
If there is a gap between the two, either cut back on the expenses or find another source of income.
Another strategy might be to look at different areas and costs. If your current nest egg won’t support your preferred lifestyle where you live now, check and compare costs in other states or cities and see if moving would make sense.
Consider the cost of living, tax friendliness, health care, Medicare options, weather, leisure activities, and other lifestyle factors you deem important.
Because it takes in so many expenses, the cost of living plays the biggest role in how far you can stretch your retirement income.
Bequests
According to surveys, roughly 75% of single retirees are motivated to leave some form of bequest. If you are planning a bequest, you need to include this in your retirement spending plan. The size of the bequest will reduce your fund amount and so also reduce what you can withdraw each month.
First calculate how long you are likely to live based on your age, gender, and state of health. Then if you want to leave a bequest add that to the amount you will need in retirement, so you don’t compromise your standard of living.
“Calculating exactly how much you can draw and spend in retirement is not an exact science,” says David Beckerman, Senior Vice President, David Lerner Associates. “There are variables that can’t be predicted. Your state of health may change suddenly, inflation could become a factor, and price hikes eat into your budget. You need to be prepared.”
Without a plan, you are flying blind. Talk to your financial advisor and devise a retirement savings plan that will be right for you when you retire.
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David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC