Retirement Budgeting: How To Make Your Money Last

January 17, 2022

Retirement is a sensitive subject for most people as it’s a life stage where a person has to adjust their life in a big way. No one is ever ready for the psychological impacts, especially if their career is tied to their identity. Financial security is also a serious concern for many pre-retirees who worry if they have enough savings to carry them through retirement. This article will lay out basic methods of budgeting and give you some tips for how to stay in the black after you are done working.

Challenges of Budgeting for Retirement

It would be wrong to assume everyone goes through the same struggles. In 2020, the top 1% of wealthy individuals in America saved almost $2.7 million in retirement savings. This is a far cry from the rest of the Americans who can barely cover their expenses, such as credit card debt. So why is the majority facing a hard time meeting their retirement goals?

Budgeting for retirement is not an easy feat. An individual goes through different phases of their life and career where their levels of income and expenses constantly change. For this reason, it can be difficult to pin down the perfect retirement plan and budget that will last through the golden years.

Timing and finding the right retirement percentage is also difficult. Some people fault the rule that people should save 15% of their pretax income for a comfortable retirement. This reasoning is that it only works for those still young, like in their 20s or 30s, but not necessarily for someone with a few years to retirement. Other retirement experts also advise stashing away 80% of the final retirement income, which is unrealistic for most. Determining how much is needed to retire depends on many factors, including income, expenses, and lifestyle choices.

66% of Americans are not confident about their retirement savings in a 2019 TD Ameritrade report. The top reason for those between the ages of 23 to 38 is high housing costs. But you don’t have to become a part of these scary statistics. Here are four basic budgeting methods and four strategies you can apply to help you plan for a smoother retirement. Obviously, you need to come up with a budget. A budget gives you a picture of how much you make and where the money goes. The top 4 budgeting methods are:

  • Zero-based budgeting: With this method, every month, the difference between your income and expenses is zero. Your money is divided between expenses, savings, and debts. You’ll essentially be putting savings into an IRA or Roth IRA.
  • 50-30-20 budgeting: This is not as complicated as the zero-based budget as you allocate 50% of your after-tax income to needs, 30% to wants, and 20% to savings. However, when your income and needs shift, you may have to adjust the allocation.
  • The 60% solution: 60% of your income is dedicated to “committed expenses” such as mortgage, utilities, insurance, groceries, and taxes. The rest of the 40% is divided into four ways (10%) into retirement savings, long-term savings, short-term savings, and fun money. This can increase your retirement income over time.
  • Rolling (continuous) budget: This strategy can be good for retirement budget planning as it covers short-term (every month) and long-term (every six months) goals. While it can be time-consuming as the budget keeps changing, it takes into account any changes in your income and priorities.

Ways to Realistically Budget for Retirement

Get an Estimate of Your Retirement Income

Sum up all your income sources and assets, including social security, 401ks, and stock dividends to determine your expected monthly income. Retirees are advised to have 70%-80% of preretirement income in their retirement budget. If you’re earning $ 50,000 annually, you should expect to be spending during retirement between $ 35,000 to $40,000.

Evaluate All Your Expenses

What are your fixed and variable expenses? This can range from groceries, utilities, insurance, housing to family entertainment. Calculate your current expenses and make a comparison with your expected income.

Depending on your budgeting goals, you may have to either increase your income or minimize expenses. You can establish another part-time income or maybe move to a smaller apartment.

Also, be sure to factor in those expenses that are a must during your retirement, such as medical costs, which could take at least 15% of your living expenses while you will spend less on housing costs.

Build a Budget and Follow-Through

Now that you have an idea about your expected income and expenses, draw a budget using any method that fits your needs. Adopt positive habits that will enable you to live comfortably on your savings. You can find an accountability partner if it’s hard to stay disciplined. Use a lower credit card limit to avoid racking up debt. Ensure to always monitor your budget to see if everything is going as planned or if you need to make adjustments based on any life changes.

Set Aside an Emergency Fund

Having an emergency fund in retirement to cover unexpected expenses will help stretch out your savings. Just keep reimbursing after drawing to pay for unplanned medical expenses or major car repairs.

Start with as little as $100 if you cannot save the recommended three to six months’ worth of living expenses. Also, have a separate savings account from your daily spending account. Reviewing the budget may also allow you to add extra dollars to the fund.

Avoid Being Unrealistic in Your Budgeting

Your retirement budget will always be unique from the next person. You may have heavily invested in your financial security and physical health, enabling you to have an easier time during retirement. Or you are living paycheck to paycheck. Either way, budgeting now and staying consistent is better than nothing.

As a parting shot, when budgeting doesn’t make mistakes such as estimating your expenses, you could be overspending unknowingly. Gather all the relevant documents, such as bills, to get the actual figure. Another mistake is not prioritizing how to allocate your cash. Instead of saving for a vacation, you can put the money into emergency savings.

Furthermore, avoid having a restrictive budget, making the task hard to commit. Just set realistic expectations and reward yourself when you achieve a financial milestone. The key takeaway is that budgeting is hard, but anyone can do it well with the right tools and a good head start.

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