Retirement Income

Everything to Know Before You Retire

Woman at computer - things to know before you retire

Retirement is a life-changing event. And like many things in life, preparing for retirement requires a lot of planning. You do not want to be one of those people who want to retire, but when that day finally arrives, they just let it happen. You want to be smart and invest time in planning and preparing for a big day.

Getting closer to retirement can be both exciting and stressful. You need to know if you are financially ready. And you need to understand how you will spend your days when you stop working.

Retiring without a plan can be disadvantageous. The better you are prepared and see what you are retiring to, the more successful you will be at this transition. Sometimes a step-by-step guide or “to do” list can help. I have created this post with all the things you need to know before you retire.

1. Know your financial situation and retirement needs.

The first step is to evaluate your finances. I read that new retirees have some financial anxiety related to the fact that they no longer earning a regular paycheck. The Baby Boomer generation is redefining what senior living and ‘retirement’ means.

The Boomers want more out of their retirement lifestyle – more activities, more wellness, and sometimes more of everything. But all these luxuries cost money. Not to mention ordinary bills for food, transportation, utilities, medical insurance, and taxes that must be paid every month.

Calculate what you need financially to support your retirement lifestyle.

You should have enough saved to live on 80 percent of your annual pre-retirement income. This number is a good rule of thumb if you do not plan on making any major budget changes.

When you retire you do not need a lot of things that you did when you were working. The costs of commute, take-out lunches, and business clothes will go down. But you will start spending more money on travel, hobbies, and activities. And your medical expenses will increase with time.

You might have a general idea of what you spend now. But you will be better prepared if you get a clear picture of your current cost of living and how that might change in the future.

The best advice is to create an estimated retirement budget based on your current and future expenses.

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Get a clear picture of your retirement income.

money bills & calculator - know your financial situation

When you are working, you probably have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income. As a retiree, you receive income from multiple sources: Social Security, pension, part-time job, or rentals.

Another source of income will come from your nest egg – investments and retirement savings:

Tax-deferred accounts – 401(k), IRA
Tax-free – Roth IRA, Roth 401(k)
Taxable investment accounts
Taxable bank checking and savings accounts

You need your nest egg to last through the next 20 or 30 years. Therefore, it is recommended to withdraw a safe 4 percent from your retirement portfolio.

For example, if you have $500,000 in your retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, and calculate if it is enough to cover all your retirement expenses.

According to the stats, the average Social Security benefit in 2020 was about $ 1,514 a month, or about $18,170 a year.

To calculate the retirement income based on the numbers above:

$20,000 + $18,170 = $38,170 a year or $3,180 a month.

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Know your withdrawal strategy.

Do you know how much income you can pull from your nest egg? A good starting point for many retirees will be a well-known rule of thumb – the “4% rule”.

The 4 percent rule refers to your withdrawal rate. If you have a well-balanced retirement portfolio (60 percent stocks and 40 percent bonds), you can withdraw 4 percent of your account balance.

For example, if you have $500,000 saved in retirement funds you can withdraw 4 percent of that amount – $20,000 in the first year of your retirement. Then, you should adjust that number every year for inflation. But following this rule should help you not to run out of money for at least 30 years.

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Think about your tax strategies.

We still need to pay taxes in retirement, but not all sources of income are taxed the same. Withdrawals from tax-deferred accounts such as 401(k) plan and traditional IRA will be taxed as an ordinary income.

Withdrawals from Roth IRA and Roth 401(k) plan will be tax-free. If you want to withdraw money from taxable investment accounts, you will have to pay capital gains taxes.

In addition to taxes, you need to remember about required minimum distributions (RMD). You will face this requirement when you reach the age of 72.

By the US tax law, you are required to start taking withdrawals from your retirement accounts such as 401(k) and IRA. The amount you must withdraw will be determined by the IRS. If you have more than one retirement account, you need to withdraw money from each account.

You need to remember that RMD withdrawals might push you into a higher tax bracket and you need to plan how to pay for additional taxes.

Know your medical expenses and long-term care coverage.

You will become eligible for Medicare at the age of 65. If you plan to retire before age 65 you will need to find a separate plan to cover your medical expenses.

Many baby boomers who are close to retirement still believe in free Medicare. I assume people do not do enough research to understand that Medicare does not cover all your medical expenses.

Medicare does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long-term care, personal care, and other expenses. It is important to remember that healthcare is the second biggest expense in retirement after housing and you need to plan for it.

We all know that the healthcare cost is rising. According to recent data from Fidelity, the average out of pocket healthcare cost for a 65-year-old couple will be close to $285,000 instead of $265,000 as it was a few years ago. And that number does not even include long-term care costs.

2. Expect to go through the emotional stages in retirement.

woman - rocky beach - things to know before you retire

Most people go through an emotional process when adjusting to retirement. In the beginning, there is a feeling of freedom and being like on a vacation that is going to last forever. Then, after a few years of fun and enthusiasm, you might start feeling bored.

You will learn that retirement is not a constant vacation. Eventually, you will realize that you have to fill up your days with something more meaningful than just traveling or playing golf.

It is good to be mentally ready for your new phase of life. You do not want to realize that most days you have nothing special to look forward to when you wake up in the morning. Or you do not have any reason to leave your house during the day. Or deep inside you wish you were not retired.

Like many other life transitions, retirement comes with emotional and mental adjustments. If you learn more about the emotional stages of retirement you will know what to expect. That knowledge will help you to better navigate the transition to retirement.

3. Structure your days in retirement.

Before retirement, your life has a predictable routine. The alarm goes off, you take shower, have breakfast, pack your lunch, and head out the door. Your job gives you focus and discipline and forces you to get up every morning. Work takes priority and everything else in life is scheduled around it.

But when you retire, there is nothing but time. Thus, you need to replace the established routine with something new. Waking up and trying to figure out what to do each day can be depressing.

You need to create a new routine that helps you plan your days otherwise you have no reason to get up every morning. It could be a hobby, a sport, a new skill, a part-time job, or volunteer work. Do not go to retirement without having a plan about what you are going to do to stay busy.

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4. Stay socially active and grow your friendship.

After many years of meeting people at work and seeing them every day, it might not be possible to keep up with them when you retire. You might feel isolated from your friends. You might start drifting through the days without much to do if you do not get socially connected with other people.

You can stay connected with your old friends by planning social events. If you are friends with other couples, invite them over for dinner or board games once a month. For many people, their social life relates to their work. However, you can do many things to improve your social life in retirement.

Take advantage of your free time in life to make new friends. It is not hard to find a volunteer job, join a group in the local community, or start taking a class at a senior center. Another thing you can do is to start a new club or join the club. It could be a reading club, a walking club, or a gardening club.

Staying socially active will restructure your daily routine. It will help you to feel that you are doing something meaningful beyond watching Netflix, doing crosswords puzzles, or reorganizing the house.

Putting It All Together

I am sure you have thought a lot about how you will enjoy your life in retirement. But there is a good chance you never thought much about how to transition from the workplace to retirement.

The key to a happy and comfortable retirement is in planning and preparing for it. It includes not just financial planning but envisioning your life in retirement. The more time you spend to know your retirement lifestyle goals, hobbies, and activities, the more successful you will be at this transition.

And If you do it right it might be the best time of your life!

Are you ready to retire? Do you have a clear picture of your retirement? Share your thoughts in the comments below.

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Financial New Years Resolutions for Baby Boomers

by Maggie Leave a Comment

a piece of paper _new year resolutions for baby boomers

Happy 2021! In the spirit of the New Year, I have put together a list of financial New Year’s resolutions for baby boomers.

These financial goals are especially important for people who are planning to retire within the next 10 years. I personally think that the beginning of the year is a great time to start something new and work towards a goal.

Here is the list of financial New Year’s resolutions for baby boomers:

1. Determine how much of the nest egg you will need.

When you are near retirement, it is important to know how much of the nest egg you will need to live comfortably for the rest of your life. How do you figure it out? You have options.

The typical advice is you should aim to replace 70 to 80 percent of your annual pre-retirement income. For example, if you earn $70,000 per year before retirement, you should expect to live off $49,000 to $56,000 per year.

Also, you can use an online retirement calculator. Take a few minutes to enter initial information and then see the numbers, and where you stand today.

Vanguard – Retirement Nest Egg Calculator

Or you can use your current expenses and determine how it will change when you retire.

The best advice is to create an estimated retirement budget based on your current and future expenses. You might have a general idea of what you spend now. But you will be better prepared financially for retirement if you have a clear picture of your expenses now and how that might change in the future.

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2. Get a clear picture of your retirement income.

When you are working, you probably have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income.

As a retiree, you receive income from multiple sources: Social Security, pension, part-time job, or rentals (if you have any).

Another source of income will come from your nest egg – investments and retirement savings:

Tax-deferred accounts – 401(k), IRA
Tax-free – Roth IRA, Roth 401(k)
Taxable investment accounts
Taxable bank checking and savings accounts

Getting a clear picture of your retirement income will help to make sure you have enough money to cover all your living expenses.

To make your assets last through the next 20 or 30 years, use the rule of thumb to withdraw 4 percent of your portfolio annually.

For example, if you have $500,000 in retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, pension, and other savings, and calculate if it is enough to support the retirement of your dreams.

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3. Set a target retirement date.

woman and man walking on the beach - financial new year goals for baby boomers

Another important financial goal for baby boomers who are near retirement is to set a target retirement date. We all need to plan for the day when we are ready to retire or can no longer work.

Based on your target retirement date, retirement income, and what you want to spend in retirement, you can determine if you have enough money saved for your golden years. If it is not enough for a comfortable retirement, move the date, and save more into your retirement funds.

Related Article:

7 Financial Mistakes to Avoid in Retirement

4. Update your budget.

What is your budget? How much you want to save and how much to spend in 2021?

Sticking to your budget can help to know where your money is going. If you want to save more money for your upcoming retirement, begin eliminating some expenses that may not be important to you anymore.

When you retire, you do not need a lot of things that you did when you were working. The costs of commute, take-out lunches, and business clothes will go down. But you will start spending more money on travel, hobbies, and activities.

Balancing income with your spending plan will help you to save more money for retirement.

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5. Maximize your retirement savings.

Whenever possible, increase your retirement contributions up to the maximum allowed in retirement plans such as 401(k), IRA, and Roth IRA.

When you are a few years away from retirement, being short on retirement savings can be problematic. The best option is to start reducing expenses in your budget, so you can put more money into your retirement savings.

The 2021 contribution limits are:

$19,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000.
$6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people age 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).

Related Article:

Why Do You Need to Max Out Your 401(k)?

6. Get out of debt before retirement.

Paying off debt, no matter how much you owe, is a key to a stress-free retirement. Getting into retirement with any kind of debt will put a burden on your lifestyle.

The best advice for baby boomers is to pay off all your debts before you retire including a mortgage.

When you are working, you have years of earned income to pay a mortgage, credit cards, student, or any other kind of loan. But once you retire, you will be living on a fixed income.

And when you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.

Being debt-free gives you more freedom and money left in your pocket to enjoy your golden years than struggling to pay the mortgage or other debts.

To pay off all debt including a mortgage might not be realistic for everyone. However, the less debt you have, the better you are prepared financially for retirement.

Related Article:

How to Pay Off Debt Before You Retire

7. Rebalance your portfolio.

list of 2021 goals - financial goals for baby boomers

The 2020 year has been a volatile year for financial markets. It can be tempting to stay away from stocks to reduce the risk of losing money in your retirement funds.

But stocks provide growth, and investing for growth is important at this stage of your life. If you retire at 65 and spend 20 years in retirement, you need to have enough growth to make your money last that long.

Take the opportunity to review your asset allocation and make sure your portfolio is diversified and invested for growth. You should have a mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals.

You need to remember that a well-balanced portfolio will help you to weather market downturns. Also, it will potentially generate a retirement income to cover your living expenses.

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8. Think about the future medical cost.

Health care is expensive. Unfortunately, many baby boomers forget to include it in their financial plan. Medicare will cover most of your routine health-care costs if you retire at age 65 or older. Unfortunately, it does not pay for all medical bills, and it does not pay for long-term care at all.

Underestimating health care expenses or how to pay for long-term care can be a big financial mistake. Think about your future medical cost and find ways to protect your retirement savings.

Consider buying long-term care insurance which can help to pay for home health aides in your late years. If you buy long-term care insurance now, your premiums will be lower than if you wait several years.

It is recommended by many financial gurus to open a health savings account (HSA).

The money you can contribute to HSA is tax-deductible or pre-tax. And any increase in the value of your account is free from federal taxes. But it has to be used for qualified medical expenses otherwise you will be paying income tax and penalties on your contributions.

The 2021 HSA contribution limits are:

$3,600 for individual coverage
$7,200 for family coverage

You can put money into HSA every year until you enroll in Medicare benefits. After that, you are no longer allowed to contribute. However, money that you do not spend will be accumulating in this tax-free account until you need it in retirement.

Related Article:

5 Ways HSAs can Fortify Your Retirement

9. Plan where you will live.

Where you will live in retirement could have a big impact on your living expenses. Consider this option – sell your big house in an expensive location and move to a smaller house or condo in a low-tax state. In this case, your living expenses will be reduced, and you might have some extra income to pay for things you love to do in retirement.

You may also consider staying in your town but moving to a smaller home or condo. That will be more financially manageable while living on a fixed income.

But if you are planning to move to a big city you should be financially prepared to spend more money because retiring in a booming metropolis can be pricey.

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Final Thoughts

I know many people do not bother with New Year’s resolutions. But I find them to be very motivating. New Year’s financial resolutions are a great way to take steps to move towards your new goals.

What is your New Year’s resolution? Do you have any financial goals?

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15 Ways to Live on Less in Retirement

by Maggie 2 Comments

older couple walking - live well on less money in retirement

Do you know how much money you need to live on in retirement? Have you been honest with yourself?

Everyone wants to have a happy retirement without the worry of not having saved enough or spending your savings too quickly.

Before you retire, look at your current expenses and see how much you will need when you leave the 9-to-5 world. Be honest about your retirement savings and calculate if it is enough to support you for the next 20 or 30 years.

Fortunately, a happy retirement does not always come with spending a lot of money. It only takes several steps to reduce retirement expenses so you can live well on less money.

Explore 15 ways to live on less in retirement:

1. Stop saving for retirement.

Once you retire, you no longer must save for retirement. If you have been saving 10 or 20 percent of your paycheck for decades, you no longer have to do that.

You do not need to save thousands of dollars to your 401(k) or IRA retirement accounts each year anymore. This chunk of money can be eliminated from your budget. It is time to start spending your savings.

2. Save money on commute.

Once you retire, you do not need to commute to work every morning. This means saving money on car parking, maintenance, and gas.

Every year we spend over $6,000 on commute including parking, maintenance, fuel for 2 cars, and T-passes for the subway to get to Boston. When our commute is over, we can save a lot of money every year.

3. Do not buy expensive clothes.

When you stop working and spend many hours at home or in your garden, there is no need for ‘a dress to impress’. Say goodbye to your business clothes and wear something comfortable for your new daily activities.

I know that I will save some serious money when I stop buying expensive clothes, shoes, and accessories for work. My new outfits will be something simple and comfortable and what I want to wear. The best part is that I will spend less on clothes and more money on fun stuff, travel, and activities.

4. Downsize to a smaller home.

Homeownership is one of the most expensive categories on the retirement budget. That is why downsizing to a smaller home is a smart way to lower your monthly living expenses.

Moving to a smaller home will help to reduce utility bills, cost of maintenance, repairs, and cleaning. If your current home is paid off, you can use available home equity to buy a smaller home without taking on another mortgage. Moreover, moving to a smaller home will save you more money in the long run.

If you do not plan on downsizing, consider other housing alternatives to reduce monthly expenses:

Rent out a room in your home.
Rent out your garage.
Take a roommate and split the mortgage payment.
Make money with Airbnb and rent out extra rooms in your home.

5. Relocate to a low-income or no-income-tax state.

Moving out of a high-income tax state in retirement is one of the best ways to stretch your retirement funds. But you still have to ask yourself if it worth it. Probably it does not make any sense to move If you do not pay a lot of state income tax today and do not expect to pay more when you retire.

Living in a high-income tax state like Massachusetts, we paid a maximum of $6,200 over the years. I am not sure if it worth it for us to sell our home, hire movers, find a new place to start a new life somewhere else only to reduce a tax bill.

However, if we paid $20,000 or more in state income tax and expect to pay the same amount in retirement, I would plan on moving to a low-income or no-income-tax state.

Article: Perils of Moving to a No-Tax State

6. Reduce insurance premiums.

home office - live on less money in retirement

Before you retire, you should plan how to live on less money. One of the ways to cut your retirement expenses is to reduce insurance premiums. You can ask your home insurance company for a senior discount.

Many home insurance companies provide discounts for retirees because they spend more time at home which reduces the risk of fire, flood, or robbery.

Another way to reduce your insurance premiums is to tell your car insurance company that you will no longer be driving to work. The more you drive, there are more chances for you to get into an accident.

Daily commuting is a big risk factor because car collisions typically happen during periods of heavy traffic. When you retire, contact your car insurance company, and ask them if you qualify for a low-mileage discount.

7. Downsize your vehicles.

We own 2 cars, and last year we spent $4,950 a year (or $412 a month) on license fees, insurance, maintenance, repairs, and gas. We even had spent more money when our cars were financed with loans.

Owning 2 or 3 cars is often required when you live in the suburbs and work in the city or have kids. But when you retire, you do not need to have 2 or 3 cars. It stops making so much sense and hurts your budget.

To live on less money in retirement, you should downsize to one car or no car at all if you want to move to the city and use public transportation.

8. Reduce your bills.

There are many ways to reduce your retirement expenses. One of the most popular ways is to get rid of cable and cancel your landline phone service.

I have to admit we still have a landline phone, and it costs $30 a month or $360 a year. When we retire and start living on a fixed income, it will be a lot of money to pay for something we do not use often anymore.

I know that we should cancel our landline and use only cell phones. In the modern era of texting, Facebook messaging, and emails, people do not call each other as they used to do.

We have cable TV, and our last year bill was topping at $75 a month or $900 a year. I struggled with the question: “Should I get rid of cable?”

Honestly, we do not watch hundreds of channels on TV, and I do not like to be interrupted with commercials every 10 minutes. Internet streaming service like Netflix and Amazon Prime costs much less and offers more entertainment.

So far, we did not get rid of cable but changed from Verizon Fios TV 300+ channels to Verizon Fios TV plan with fewer channels for a price of $55 a month or $660 a year.

If you plan to live on less money in retirement, you should not overpay for things you do not use often.

9. Find free activities or use senior discounts.

As a retiree, you can find many great things to entertain yourself for less money. There are many free local summer concerts, fall festivals, events at libraries, or social activities at a senior center.

Many museums offer free days or evenings for visitors. When you do not have to work, it is much easier to visit museums on a weekday with a smaller crowd.

Using senior discounts is another way to live on less money and still enjoy your retirement. You can ask for a senior discount at many places:

gym membership
local museums and concerts
state parks and beaches
golf courses
restaurants
local stores and supermarkets

Article from AARP: 10 Places to Ask for Senior Discounts

10. Find travel deals and travel off-season.

flowers-lake-mountains - travel off-season

Traveling is the number one goal on the retirement bucket list for many baby boomers. But traveling is expensive. It includes hotels, air tickets, restaurant meals, rental cars, entertainment, tours, and more. But If you want to travel on less money, and still fulfill your retirement dream, look for travel deals or travel off-season.

In retirement, it is much easier to save money on travel because you have the freedom to travel when the best deals are available. Start with looking at cheap accommodations. Instead of paying for the hotels, look at websites like Airbnb, VRBO, or Vacation Rentals to see what they have to offer at your destination.

Airbnb

VRBO (Vacation rentals by owner)

Vacation Rentals (Home to Go)

Check airline prices and find the cheapest flights. Sign up for free price alerts. Be flexible on dates and be flexible with your travel destination. Fly out early because the lowest price flights are the first flights in the morning. Fly on the cheapest days of the week – Tuesday, Wednesday, and Saturday.

Look for senior discounts to museums, concerts, parks, and other tourist attractions. With available discounts and deals, you can save a lot of money and travel for less.

If you like to travel but concern about spending too much money, do not travel far. Drive a few hundred miles rather than fly to your destination. You will save money on air tickets, airport food, overpriced hotels, rental cars or taxi, currency exchange, and other charges.

11. Cook at home and cut down on eating out.

Eating out often might be expensive when you start living on a fixed retirement budget. One of the ways to save money is to cook more meals at home.

I like to cook, but I can see how it might be boring to eat at home all the time when you are retired. You easily get caught in a routine of the same dishes – pasta and meatballs, fish and rice, or chicken noodle soup.

To save money and still have fun, plan on eating out at lunch rather than at dinner. Many restaurants have a cheaper lunch menu. Instead of eating out once a week, start eating out only once a month.

If you want to dine out in an expensive restaurant, avoid ordering appetizers, alcohol, and dessert to save money on the highest price increase items.

To cut your spending on dining out, take advantage of deals and discounts. If you receive a 10 percent senior discount on a $120 meal, it will reduce your annual cost of dining from $1,440 to $1,296. So, you can keep $144 in your pocket and still have fun eating out on a reduced bill.

Ask about senior discounts before ordering the meal. Special savings like senior discounts are not always advertised or offered by the restaurant employees because of age sensitivity.

To save more money sign up for Groupon to receive coupons or discounts. And check out the AARP website for restaurant discount deals.

Article: AARP Restaurant Dining Discounts.

Groupon website

Also, consider a rewards credit card for your everyday spending – like getting cash back. If you do not have any debt, you could easily use a credit card to earn cashback on your groceries and even travels.

The key to making the most out of credit card options available today is using them for purchases you can afford to pay off and paying your bill in full every month.

Best Cash Back Credit Cards of 2020

12. Stay healthy and fit.

To keep your medical expenses down, stay healthy and fit. The cost of healthcare is rising every year. So, it is important to stay healthy in retirement. Start with developing good habits in your new life. Create an exercise routine and follow it thoroughly.

You do not need to spend extra money on expensive personal trainers or gym membership. Walking, running, or cycling outdoor is more than enough to stay in good physical shape for years. Explore your local walking and jogging trails. Those 30 minutes a day you need to spend walking can be done in a local park or greenway path.

Leave the car at home and walk or bike to the local store, bank, or post office. Gardening or decluttering are easy ways to keep you active and fit.

Follow a healthy diet rich in whole grains, vegetables, fruits, and low-fat dairy products. Additionally, do not forget to shop smart and always read food labels to avoid foods high in cholesterol and saturated fat.

13. Keep track of retirement expenses.

It is important to stick with your budget and keep track of your retirement expenses. You may need to adjust your spending habits and make it fit within your budget.

Always remember how hard it was to save for retirement. Do not fall into the consumption trap and find new ways to spend less on your purchases.

For example, try to limit spending at your favorite stores by setting up a fixed amount or just bring cash. If you do not have enough cash to pay for your purchase, do not allow yourself to pay for it with a credit card.

Another way to control impulse spending is to shop online. Compare prices, read reviews, and do not buy more stuff just because it seems cheaper. Setting up a budget for different occasions like a holiday budget or a vacation budget will help to keep track of your expenses.

14. Pay off debt before you retire.

If you want to live well on less in retirement, consider paying off any high-interest debt such as a credit card before you stop working.

It can be difficult to pay off debt while living on a fixed retirement income. These monthly payments may become one of your largest retirement expenses. Getting rid of debt before retirement will help you to live with less stress and fewer liabilities.

15. Set up systematic withdrawals from retirement funds.

Once you leave the 9-to-5 world, do not give yourself limitless access to your retirement funds. You do not want to go through them fast.

To avoid unlimited spending, you should use the ‘4 percent withdrawal rule’ for systematic withdrawals from your retirement funds. You can call it ‘my retirement paycheck’.

Set it up as a direct deposit coming from your retirement savings – 401(k), IRA, Roth IRA – into your checking account once a month. This process will help to control your spending. Otherwise, you might start treating your retirement funds as a big pot of cash.

Have you saved enough money for retirement? Do you know for how long will your money last? Have you thought about retiring on less money and the ways to do it? Share your thoughts in the comments below.

How to Prepare a Retirement Budget in 5 Simple Steps

by Maggie 4 Comments

two women with laptop at the table-retirement budget

There is a fear of running out of money in retirement among many baby boomers. As boomer women, we live longer than men, but our savings are not always enough to last long in retirement.

The main goal of retirement planning is to see how to cover your retirement expenses while living on a fixed income. Part of creating a solid retirement plan is to understand your retirement income and expenses. That means you need a retirement budget.

The best advice is to start planning when you are still working and can adjust the numbers. Preparing retirement budget will help to see if you have enough money to retire. If you are still working you have time to add to your savings, pay off debt and change your spending habits.

How do you prepare a retirement budget? I will take you through 5 simple steps.

Step 1. Calculate your retirement income

bees flying over lavender-preparing retirement budget

The more sources of retirement income you have the better off you will be in your golden years. The income in retirement will come from different sources. For many retirees, a Social Security paycheck will be the ONLY income. Other retirees will have an additional income coming from 401(k), IRA, Roth IRA, savings, annuities, dividends, and/or rental properties.

Start with Social Security and find out how much you will get paid once you retire at 62, at full retirement age which 66 or 67 for most of us or delay it until you turn 70.

Social Security website will help you to open an account if you do not have one and find out the size of your guaranteed paycheck.

Social Security website

The next source to consider is pension income. Most Americans do not have pensions anymore. But if you are lucky and have a pension add the estimated paycheck to your Social Security.

Then, look at your retirement accounts including 401(k), IRA and Roth IRA and calculate the balance on all of them.

After you calculated your retirement savings balance, find out how much it will grow in the next 5 or 10 years. For example, you have saved $200,000 on your retirement accounts. If this money grows at 6 percent per year, it will be worth $267,645 in 5 years or $358,170 in 10 years. I like to use an online calculator for estimating my investment portfolio growth:

Smart Asset investment calculator

Using a 4 percent safe withdrawal rule will help to see how much income you can generate from retirement accounts. It would generate around $10,405 or $14,326 a year of income.

Finally, calculate the total of your combined retirement income:

SSB + pension + retirement accounts + bank savings balance + rental income + business income = combined retirement income.

Step 2. Estimate your retirement expenses.

man using notepad and laptop-preparing retirement budget

Step 2 will help to find out how much money you need in retirement by accurately projecting your retirement expenses. It is easier to control your spending than retirement income. And we all know that if we spend less than our monthly income, our retirement funds will last longer.

A simple way to estimate your retirement expenses is to know where and how you spend your money today while still working.

Divide your expenses into 3 main categories:

Essential – need to have
Non-essential – want to have
Unexpected and/or one-time expenses

Label your expenses as either essential or non-essential. It will help to see where your money is going.

Essential expenses – need to have:

Your essential expenses are expenses you cannot live without in retirement:

Mortgage or rent
Utilities
Transportation
Food
Medical

When you retire, you will still have to spend money on these expenses each month. But how it will change in the future when you stop working?

Here are the same budget categories but the cost of it might change when you retire.

Housing – Are you planning to downsize, pay off your mortgage, rent, or relocate to a more affordable place? You have to include the property taxes and maintenance costs if you’re an owner.
Utilities – Cost of utilities might go up or down. If you relocate to a warmer state, include the additional cost of air conditioning.
Internet/ cable/ phone – Are you planning to spend a lot of time at home reading and gardening or some of your hobbies include using the internet? You should include the approximate cost of the internet and cable in your retirement budget. Many people cut costs by switching from cable TV to a streaming service.
Transportation – How your transportation needs will change in retirement? How many cars do you have? Are you planning to downsize your vehicles? Will you buy a new car or a boat? Calculate how much you pay each month for gas, car insurance, and parking and decide how it will change when you stop working.
Food – How much you will spend on food depends on your eating habits. Most retirees start eating out less and prefer to have homemade meals. This budget category expense can be significantly reduced.
Medical – It is hard to calculate medical out-of-pocket expenses, along with premiums for Medicare. Yes, Medicare provides health insurance, but it does not pay for all medical bills and it does not pay for long-term care at all. There is no way to know how much it will cost. But according to Fidelity Investments, a healthy couple can expect to spend on average, a total of $275,000 out of pocket on healthcare expenses in retirement. And a long-term care cost is not included in this number.

Non-essential expenses – want to have:

These expenses are your extras. Make sure to leave room for fun when calculating your future cost of living. You worked hard most of your life while saving and planning for retirement. Traveling, camping, attending a concert, or eating dinner with friends will be part of your fun years. You need to plan for that and include the cost of it into your retirement expenses.

Traveling/ vacations
Hobbies
Entertainment
Gift/ charity

Many of my friends who already retire admitted that every month of their retirement look different than the month before. Some months they spend a lot of time at home. Other months, they are on the road visiting friends and family or traveling abroad.

Unexpected and/or one-time expenses:

Urgent medical expenses
Unexpected car or home repairs
Home improvement
Wedding
Grandkid’s college tuition
Funeral

By including these expenses into your retirement budget, you will minimize the chance to be surprised by these events. You wanted to be sure that you have enough money to cover these expenses. One way to deal with unexpected is to have an emergency fund. Instead of panicking at every unexpected bill, you will have a small pot of money at hand and ready for use.

For our retirement expenses I like to use a worksheet from Vanguard:

Vanguard retirement expenses worksheet.

Step 3. Compare your retirement income and expenses.

architecture - retirement income and expenses

After calculating retirement expenses compare it with your retirement income and see how much you have left over.

Retirement income – retirement expenses = cash flow

Once you stop working you can rely only on the income generated from your savings and Social Security. And if you do not have enough retirement savings, you will have to rely only on one source of income – Social Security. Even Social Security is considered a guaranteed income, but it might be not enough to cover all your expenses.

It is important to have enough income to pay for your monthly essentials. Thus, first look at your Social Security benefits and see how much it will cover. Next, calculate how much money you have to withdraw from retirement savings to cover other expenses.

You can boost your retirement income by downsizing your home or delay retirement for a few years. But those may be not the options for everybody. Most baby boomers will need to reduce their expenses and change spending habits so they can live on their available income.

I calculated that Roman and I will need to have $60,000 a year ($5,000 a month) to cover our expenses for the first 5 years of our retirement. We plan to downsize, sell our house and rent an apartment before we decide if we want to buy a condo. We like to travel and have a long bucket list of places we want to visit. If we do not delay our benefits until age 70, our estimated Social Security paycheck will be $42,000 a year ($3,500 a month).

Thus, we will need to withdraw an additional $18,000 a year ($1,500 a month) from our savings. Many advisors recommend withdrawing 4 percent from savings so your retirement funds last longer. We can withdraw up to $20,000 a year from our savings to follow this rule and feel safe.

If I want to bump that number to 5 percent and withdraw $25,000 a year from our savings, we will spend our retirement funds faster. I would rather adjust our lifestyle and reduce our expenses to fit a safe rule of 4 percent withdrawal than to deplete our funds fast. The goal is to adjust our lifestyle to fit our available income.

Even the whole process looks like a lot of work, remember that calculating these numbers now will make life in retirement much easier.

Step 4. Add inflation and taxes to your retirement budget.

Inflation is real and it will erode the value of today’s dollars over time. Many advisors suggest including 2 or 3 percent inflation to retirement budget. But if you are like me and have no intention of moving your retirement portfolio out of the market, you should expect that keeping money in the market will help to fight inflation.

When you start preparing a retirement budget first thing you want to know is how much income you have available to pay the bills each month. But whatever number you calculated in Step 1 may not be yours to keep in full. Your withdrawals from retirement accounts like 401(k) and IRA will be taxed year after year. And depending on your retirement income so might be a portion of your Social Security paycheck.

Hence, instead of being surprised by taxes, budget for them. Look at your current tax brackets and try to figure out yours in retirement based on estimated income. Then add that money to your retirement budget. You will pay lower taxes in retirement because you will have less income. But you still need to have money to pay taxes every year.

Step 5. Keep updating your retirement budget.

a woman on a suitcase-retirement expenses

I know that my retirement budget is not perfect and needs to be updated. But it is a starting point that allows me to learn how much income Roman and I need to replace when we stop working.

Budgeting for retirement is not a do-it-once-and-forget exercise. Retirement budgets are living things that need periodic checkups. Once you retire you need to keep updating your spending, income, and withdrawal numbers, because spending in retirement could go easy out of hands.

Also, you need to keep an eye on your retirement portfolio growth and make sure that all is going according to your plan. Otherwise, you need to adjust and fit your lifestyle to available income.

Final Thoughts

None of us wants to spend our fun years worrying about money. Everyone wants to enjoy retirement. Follow these 5 simple steps and start preparing your retirement budget. It should help you to stay on track financially so you can enjoy your fun years and avoid stress.

Do you have a retirement budget? Have you thought about preparing a retirement budget? Share your ideas with us in the comments below.

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Disclosure: This information is only educational. The intent if this post is to provide a simple guideline for an extremely complicated matter. I am not providing any specific financial advice or recommendations to any of my readers.

6 Steps Guide to Organizing Finances for Retirement

by Maggie Leave a Comment

women planning tasks w/ sticky notes-organize finances for retirement

When I think about retirement I think about financial security in my golden years. It’s not about the size of your nest egg, but about how to manage your finances.

You need to get a clear financial picture before you quit your job. You need to figure out everything about how many accounts you have, how to manage them, in what order to withdraw money, tax liabilities, how your investments will generate income.

Organizing your finances for retirement will help you to feel more comfortable with your retirement decision. Instead of giving up on the retirement bucket list, you want to match your lifestyle to your available resources.

Moreover, organizing your finances for retirement will give a sense of control over your life. It will make the transition to retirement much easier to manage.

In this post, I want to go over 6 steps required if you want to get your finances in order before retirement.

1. List all your retirement accounts.

laptop, notepad and coffee -organize finances

In retirement you’ll be paying yourself from the savings you have accumulated over the years. Thus, the first step to organizing your finances should be listing out all your retirement accounts.

Over the years Roman and I accumulated several 401(k) accounts from different employers. We managed to roll over them to our individual retirement accounts – IRAs and even Roth IRAs.

So far, we have multiple retirement accounts – (1) 401(k), (1) 401(k) Roth, (3) IRAs, (2) Roth IRAs and (1) investment account. I want to simplify our finances before we retire and combine them into one account.

When I roll over these accounts to a consolidated investment account it will be much easier to work with available funds. It will be easier to manage money withdrawals and decide on an investment approach with only one account.

Listing out all your retirement accounts will give you a better idea of the available money you have to manage.

2. Write down your assets and liabilities and calculate your net worth.

white graphing paper with numbers - organize finances for retirement

You next step is to organize your assets and liabilities/debt. This step should help you to get a general overview of your finances and estimate your net worth.

You can do it on a simple piece of paper or create a spreadsheet in Excel, Word, or Google.

How to Make a Spreadsheet in Excel, Word, and Google

Assets

List everything you own. Start with your major assets like home, cars, boat, vacation home, rental properties, collectibles, gold coins, and anything else that has tangible value.

When you list these items try to come up with their real value and not the price you want to sell those things. Your major assets gained a lot of value over the years and can be sold if you’re ready to liquidate them or in a bad financial situation.

In addition to gathering information about the value of your major assets, you need to add information about other savings outside of your retirement accounts. List all your bank checking and savings accounts, investment accounts, stocks or bonds, CDs, and money market accounts.

Liabilities/ debt

List everything you owe. This should include mortgage balances, car loans, student loans, credit card debt, and any other debt or loan you may have.

Your net worth

Calculating your net worth is quite a simple task. Calculate the total of your assets and subtract the total liabilities/debt from that number.

Total Assets – Total Liabilities = Net Worth

You might have a negative net worth, which means you have too much debt. In this case, you need to work your way out of it as soon as possible. It will be a big mistake to start your retirement with too much debt on your hands while living on a fixed income.

3. Social Security as a retirement income

long pier on the lake - retirement security

In 2020, the average Social Security benefit for a person who retires at 66 is $18,036 per year or $1,503 per month. If you’re married the combined income will be higher.

Many Americans will rely on that paycheck as a basis of their retirement income. Social Security is called a guaranteed income. And the best part of it that it will keep coming in as long as we live.

When you start organizing your finances for retirement, it’s important to know how much your Social Security paycheck is. Look at your statement from the Social Security Administration.

Social Security

When you open the link to the website, sign in, or create an account if you don’t have one. Your Social Security statement will show how much you could expect to receive at a different age.

Depending on your birth date and year, you’ll see several numbers of expected income. The lowest income will be If you decide to claim your benefits at age 62, and the highest at age 70.

Whatever age you decide to retire, be careful of claiming your benefit right away and look at the numbers first. I always like the idea to retire early at age 62, but delay claiming the benefits until full retirement age, so I’ll get higher income for life.

4. Calculate your income, expenses, and cash flow.

bulletin board with sticky notes - organize your finances for retirement

It’s important to calculate your retirement income and expenses so you would know how to manage your spending.

Income

List all the retirement income you expect to receive. This includes your Social Security paycheck, pension, estimated income from retirement accounts, investment accounts, rental properties, business (if you own), and a part-time job.

By gathering all information will help you to have a clear picture of what income will come from which account. Also, you should remember about a required minimum distributions (RMDs) which start at age 72 in 2020 (before it was at 70 ½).

Expenses

To find out how much money you’ll spend in retirement answer a few questions:

Where do you want to live in retirement?
How do you want to live in retirement? What is your lifestyle?

If you know where and how you want to live it will be easier to understand your retirement expenses.

All expenses can be divided between essential and non-essential living expenses. I like to call them “need to have” and “want to have” expenses.

Essential or “need to have” expenses:

Mortgage or rent
Utilities
Transportation
Food
Medical and other insurance

Non-essential or “want to have” expenses:

Travel and vacations
Hobbies and activities
Entertainment

You can add to this list donation to charity, gifts, or other contributions you‘re planning to have during your retirement years.

Calculate your cash flow

Calculate the total of your retirement income and subtract your estimated retirement expenses from that number.

Retirement Income – Retirement Expenses = Cash Flow

I like to calculate our cash flow because it helps to get a clear picture of our income and expenses. It’s not about how much money we’ve accumulated over the years, but how we manage our spending.

If we want to have a secure retirement and not to run out of money fast, we need to control our expenses. I want to make sure that our cash flow is positive which means we live within our means and don’t overspend.

If your cash flow is negative it means you live beyond your means and need to cut on spending. Negative cash flow can be altered by increasing your income or decreasing your expenses. I think it’s always easier to adjust your spending habits than your income.

Understanding your cash flow situation is important because it helps you to see what kind of life you can afford.

5. Re-evaluate your retirement investment strategies

person holding glass ball -investment options

While organizing your finances for retirement, it will be a good time to re-evaluate your overall investment strategies. You need to decide what is the best way to invest your money. The invested money should provide income and growth of your portfolio during retirement years.

With age, we tend to get more conservative with our investments. When we are getting closer to retirement, we start thinking about preserving capital rather than making big profits in the stock market.

It’s recommended to have a 60/40 portfolio when you’re close to retirement. But you still need to have money invested in stocks so it will grow over time. Many people make the mistake of getting too conservative by investing too much of their portfolio in bonds. But we still need to have growth in our retirement portfolio so we can beat the inflation.

On the other hand, it will be a mistake to invest all your money in the markets. When you retire and stop receiving a steady paycheck, you need to have enough cash to pay for expenses and emergencies.

I like the idea to have one or two years of money available to provide immediate income. You can use a mix of cash and other safe investments like high quality, short-term bonds or money market accounts for quick access to funds.

6. Review all insurance policies

I try to review our insurance policies every year. But when you’re ready to retire you need to look at them more closely. Depending on your policy the home insurance could cover less or more than you need right now. The same applies to car insurance. It’s a good idea to check that your car policy isn’t covering a child who moved out of the house and not using your vehicle anymore. Make sure that your insurance policies have the cost and coverage to match your current needs.

Health insurance will come at a big cost in retirement. Our health is likely to decline with age and we will need more help from the medical professionals.

health-illness-graphic - long term care insurance

Long-term care insurance is an extremely popular topic that is discussed among financial advisors. You can spend almost $10,000 a month for full-time long-term care assistance or even more if medical care is needed.

On many occasions, Roman and I discussed if we need to buy long-term care insurance. So far, we didn’t come to any conclusions. It’s insurance and it’s expensive. You may pay a premium for years and after all, never use the coverage.

But what if one of us breaks a hip later in life. Who would help with cooking, cleaning, and bathing when the other partner is old as well? And how would you pay for someone’s help? Without long-term care insurance, you will have to spend down your funds before you see whether you qualify for Medicaid.

On the other hand, we need to look at it as we look at any kind of insurance. We have been paying for a homeowner’s insurance for years and never feel sorry that we never used it. The same was with our rental property. We had landlord insurance for a 3-family rental property we owned for years. The policy we paid for was around $1 million in liability coverage. But I feel happy that the property never burned down or being damaged so we would have to use the insurance.

It doesn’t matter if we either will need care, or we will not. What matters the long-term care insurance will allow us to afford quality care when we need it. Also, it helps to reduce the financial and emotional stress that long-term care situation can impose on the family.

Article by AARP: 5 Facts You Should Know About Long-Term Care Insurance

Putting It All Together

I’m sure that we all struggle to keep our finances in order. My biggest problem is that we have too many accounts. Lately, I have noticed that it’s getting harder to manage them. Before we retire, I wanted to make sure that we have a firm grasp of our financial situation.

My goal is to organize and simplify our finances the way we can enjoy our retirement instead of worrying about the financial unknowns. I want to have peace of mind knowing that we can manage our retirement savings wisely.

I believe that organizing your finances for retirement will help to be confident in the comfort of your next phase of life.

Have you thought about organizing your finances for retirement? Share with us your thoughts and ideas in the comments below.

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