You’ve always talked about the importance of saving for retirement. You contributed as much of your paycheck as you could for years and took advantage of catch-up contributions once you reached age 50. You stuck with your contributions through the thin years, determined to have a sizeable account to retire on. But there’s an important step you shouldn’t skip over. As you get closer to retirement, you need to make sure you’ve set up your retirement budget.
Budgeting may seem like a simple enough step, but too many people brush it aside. And if you’re flying blind into retirement, you may not be as prepared as you think.
Figure out what money you’ll have coming in.
Just like any budget, you’ll need to know how much money you have coming in so you can start planning what you can afford. Tax season is a good time to get a full financial picture since you’ll be getting financial documents together anyway.
Right now, you may be getting a regular paycheck from your job, or another form of income. In retirement, where will your money come from? If you have a defined benefit plan like a company pension, your benefits may come in the form of a life annuity. This means you’ll get a specific, regular payment for the rest of your life. If you have a 401(k) you may get a single lump-sum payment, or your money may be distributed by other options like a ten-year distribution. You may also be able to set up an annuity. Knowing this can help you plan a monthly income.
When adding up your monthly income, remember that if you’ve worked a qualifying number of years, you’ll also receive social security benefits. Typically, these benefits are for retirees 62 and older, and come in the form of a monthly payment. Of course, to get 100% of the benefit, you’ll need to reach your full retirement age, which depends on your birth year. The average full retirement monthly benefit is $1400, but your amount may vary.1 Of course, there are some tips to maximize your benefits.
You may also choose to keep working to supplement your income. Just keep in mind there are limits to your earnings to continue getting your full social security benefits.
Once you’ve added up how much you’ve got coming in each month, you’ll be in a better place to plan for spending.
Think about what money you’ll be spending.
The second part of budgeting is figuring out how much money you’ll have to spend. Think through all your expenses: debts, monthly recurring payments, gifts and donations, and of course the cost of healthcare as you get older. You’ll probably want to pull some financial documents for this. Credit cards, bank statements will help you layout your spending.
The first step is to figure out how much you’re spending on essentials. These are daily necessities. Housing, food, cable or internet, insurance, and car maintenance and gas may all be items you spend money on each month. Will that stay the same through your retirement?
It’s also important to factor in any debt while working through this stage. Are you confident you’ll pay off your debts before retirement? Most retirees plan to pay off debts before they retire, but only 23% actually end up becoming debt-free before retirement, and 38% have to adjust their spending to compensate for this, according to a study commissioned by Bankers Life Center for a Secure Retirement® (CSR). Will you need to adjust your plan now to accomplish this goal?
Once you have your necessary expenses added up, don’t forget to think through the optional things like hobbies, gifts, memberships, and vacations. These are important to factor in because they can be cut back on if necessary. Planning ahead for vacations and travel will help you know what you can afford.
Now that you have more time, you may find you’re spending more on your hobbies, but less on your professional memberships. Maybe you decide to travel more but eat out less. It’s a good idea to adjust your budget annually as things may change once you retire.
Stay on track through retirement.
Once you have everything laid out, you can see the money coming in and the money going out. Will you need to adjust your plan to accommodate your lifestyle? Or maybe you’ll even find you’re ready to retire earlier than expected (fingers crossed for that one). Think through how your income and expenses change as you age, and you can set yourself up for a successful retirement.
Staying on top of your budget and adjusting as necessary will be key to keeping your retirement years as enjoyable as you want them to be. Don’t undo all that hard work saving by forgetting this simple step!
Of course, a budget is meant to make retirement easier, not take the fun out of it! Adjust as needed, and find the balance that works for your lifestyle.
If you’re planning your retirement and are looking for someone to help you understand how far your savings will take you, or talk through ways to prepare for a quickly-approaching retirement, schedule an appointment with a Bankers Life agent.
1Business Insider, The states where people get the most money from Social Security, ranked, April 23, 2018.
This material provides general information about the described insurance product(s) for educational purposes only. This is not intended as investment advice or to recommend the insurance product(s).
The Company and its producers do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors. The general and educational information presented in this material is a sales and marketing piece for insurance products offered by Bankers Life and Casualty Company.