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Budgeting for Retirement

The current U.S. life expectancy is 77 years (2020 numbers),¹ and most Americans expect to retire around age 66.² That means, on average, you may need to plan for at least 18 years of living after retirement. Budgeting to create a retirement portfolio that will provide income for you after you leave the workforce can be daunting. How much will you need? Where does one begin? Experts differ on the ideal amounts to set aside for retirement, and factors such as inflation, rates of return, time horizon for retirement dates, taxation, Social Security, and even legislation will greatly affect projected outcomes. However, inferences can be made based on data and experience. What approach can you use to help budget for retirement?

Income Replacement

Overall, the goal is to prepare multiple streams of income. As a rule of thumb, it's recommended to plan on replacing approximately 70 percent of your preretirement income. So, a $60,000 per year wage-earner might plan to live on $42,000 per year. Note that some expenses like health care will almost certainly increase, while other expenses like housing and transportation will go down. Still other expenses may vary throughout retirement depending on activity level and lifestyle.

Up until now, income streams have primarily consisted of Social Security, part- or full-time wages, pensions, and investment income. Social Security is likely to decline, barring significant legislative and administrative changes.³ Pensions have been on the decline since the mid-1980s. Now many employers opt for defined contribution plans like the 401(k) and 457. So, if you can't rely on Social Security and don't have access to a pension, you will likely need to compensate by increasing investment contributions and postretirement income. In short, another job or significantly increased investment returns with maximum contributions may be practical for many Americans.

Budgeting

Maximizing investment contributions can be streamlined with a budgeting strategy. Keeping a budget can aid accountability in personal finances by providing a tool to observe income and expenses over defined periods of time. Using goal setting, the following of investment trends, and honest assessments alongside the budget can help consumers increase cash surpluses for the household. A successful budgeting cycle can reinforce personal motivation to sustain the success over the long term. In this case the focus is to increase the cash available to invest.

One of the main goals in budgeting is to improve the quality of life by retaining extra income. Leftover cash can often create opportunities for important goals like education or luxuries like vacations. The same is true when it comes to budgeting for retirement. The primary ways to produce a surplus are to either increase income (by receiving a job promotion or tax reduction) or to decrease expenses (by simplifying your bills or eliminating debt). Tracked categories tend to include the big areas, such as

• Income—All net sources of income after deductions and transfers
• Housing—Mortgage or rent, utilities, household supplies, and other services
• Daily Living—Groceries, toiletries, hygiene, gifts, child care, education, pets, and so on
• Other areas—Debts, entertainment, transportation, charitable contributions, and so on

Tally your income and subtract the expenses to find the surplus or the deficit. If you have a surplus, determine what portion you will utilize in your investment strategy. If you have a deficit, find ways to reduce expenses, boost income, or both until you have a surplus. Ideally, you won't have any debt as you go into your retirement so that more of your money can be spent on enjoying and maintaining your life. There are various advanced strategies for increasing assets, but budget optimization may allow for increased and targeted growth. Spending habits are one of the few things you can control. Using discipline and educated ideas, the wise consumer can establish a retirement portfolio and action plan that will provide income resources during those golden years.

Things to Consider

• You may want to consider investing in mutual funds, annuities, stocks, bonds, or other securities in addition to retirement vehicles like the 401(k).
• By 2030, 1 in 5 Americans will be over 66.⁴
• Working with a professional may provide more frequent and more confident investments.
• At age 50, you're allowed to make catch-up contributions to certain retirement accounts.
• At age 59 and a half, you can withdraw funds from retirement accounts with no tax penalties.
• Age 62 is the soonest you can receive Social Security benefits, but the benefit will be reduced.
• At age 65, Medicare is available.
• At age 66, you can receive full Social Security benefits.
• At age 70 and a half, you may be required to take withdrawals from some retirement accounts.

References

1. U.S. Centers for Disease Control and Prevention. (Updated 2022, March 25). FastStats: Life expectancy. Retrieved May 12, 2022, from https://www.cdc.gov
2. Gallup. (2021, December 27). Jaw-dropping stats about the state of retirement in America. Retrieved May 12, 2022, from https://www.gallup.com
3. U.S. Social Security Administration (SSA). (2021, December). How workers' compensation and other disability payments may affect your benefits. Retrieved May 12, 2022, from https://www.ssa.gov
4. U.S. Department of Labor. (2020, November). Taking the mystery out of retirement planning. Retrieved May 12, 2022, from https://www.dol.gov