When you imagine your retirement, what do you see? Most people have dreams of traveling, starting a new hobby, and generally living their days to the fullest. But, can you afford these retirement dreams—along with the mundane, necessary monthly expenses you’ll need to account for like bills, utilities and groceries?
Many people fear running out of money during retirement, and yet, too many people have no idea how much they’ll need to comfortably live out their golden years. According to the 21st Annual Transamerica Retirement Survey, nearly a quarter of American workers don’t have a written retirement plan in place.
Building an adequate retirement fund doesn’t have to be daunting, but it does require careful planning, creating a budget, and utilizing retirement saving vehicles—including 401(k) accounts, IRA accounts, and other accounts to your advantage.
Whether your goal is to retire in four years or forty years, now is a crucial time to evaluate your plan to determine whether you’ll have enough to live out the retirement of your dreams. Don’t know where to start? Here are a few tips to get you started.
Map Out Your Expenses How Much You'll Need to Save
The first thing you need to do is think about what you want your retirement to look like and map out how much things will cost. Are you content with paying for the necessities and living comfortably? Or, do you have dreams of traveling or indulging in other high-budget items?
As you create a retirement plan, try to accurately map out how much everything will cost. You might not have a crystal ball to see exactly what you’ll spend your money on, but here are a few critical budget categories you’ll want to look at:
Take a look at your current monthly housing expenses, including rent or a mortgage, utility bills, and maintenance costs, and consider what your living situation will look like once you retire. Do you have plans to downsize? Do you think you’ll have finally paid off your mortgage? Will you rent or will you still pay property taxes and maintenance costs? Think ahead to what housing expenses might change during your retirement, and factor them into your budget.
As we age, healthcare becomes one of the biggest expenses during retirement. And while you can switch to Medicare at age 65, it will not fully cover your medical expenses. A recent study estimates that the average 65-year-old couple will need at least $315,000 to cover health-care and medical expenses during their retirement. Spend some time reviewing all your Medicare options and their associated premiums. You may also want to consider factoring in long-term care insurance in the event you’ll need in-home health care or facility care.
How much do you currently spend each month on gas, insurance, and parking fees? As you enter retirement, you’ll no longer need to go into the office so your transportation costs may change. Will you need the same number of cars if you and your spouse are no longer working? Will you plan on using public transportation to get to where you need to go instead? Try to map out what your transportation needs will be and plan accordingly.
Cable, Internet, and Phone Expenses
Factor in your monthly digital expenses and look for saving opportunities there as well. Maybe you no longer need the ultimate high-speed internet package since you’ve turned in your work laptop? Many people have also found that they can cut costs by switching from cable TV to a streaming service. Assess your needs and try to find cost saving opportunities during the process.
Just because you’re no longer receiving a paycheck from a full-time job, don’t automatically assume you’ll be in a “lower” tax bracket once you retire. During retirement, you may no longer be claiming exemptions for a mortgage or dependents, which will likely raise your taxable income. Also, up to 85% of your social security can be taxed depending on your overall income. You may also have to pay taxes on any distributions from an IRA or 401(k). One study shows that retirees will have to pay at least 6% of their income in taxes, so make sure you’re adding enough to the budget to pay Uncle Sam.
Travel, Hobbies, and Other Bucket-List Items
Your retirement should be about living the rest of your days to the fullest, including taking more trips, investing in hobbies you’ve always wanted to try, and crossing off bucket list items. Make sure to factor these non-essential expenses into your budget to see if you have enough money to live out your retirement dreams.
Review Your Sources of Potential Income
Now that you know how much everything will cost, you’ll need to figure out how you’ll pay for it. The next step is to add up all the income you might receive in your retirement years and see how it matches up with your expected expenses.
You should factor in things like pension income (if your employer provides one), social security payments, distributions from a 401(k) or an IRA, and any other dollars you expect will come your way, like income from a part-time job you may decide to take on or passive income from a rental property.
Once you’ve tallied up your income sources, divide that number by how many years you plan to live in retirement, and you’ll get a rough number of what your annual income will look like in your post-working years. Do you have enough to afford your ideal retirement? Or, do you need to make some lifestyle changes to make your future budget work for you?
Maximize Your Retirement Contributions and Diversify Your Accounts
After reviewing how much money you’ll have coming in and what expenses you might expect, it might be time to review your current retirement savings strategy. Many people take advantage of their employer-sponsored 401(k) but fail to consider the additional benefits a Roth IRA can provide. By diversifying your savings and investing in both accounts at the same time, you can take advantage of the compound interest in both accounts.
Try to contribute as much as you can to these retirement accounts while you’re in the workforce. Better yet, set up automatic contributions to be deducted from your paycheck so you can save without even thinking about it. With an IRA from TFNB, you can set up automatic contributions to make sure you’re faithfully building your savings accounts, no matter what.
Test Your Budget Before You Make the Move to Retirement
After you’ve set up a retirement budget, it can be a good idea to test drive your plans while you still have a full-time paycheck you can rely on. Set your retirement budget as your new monthly budget for a few months, and see what happens. Did you save more than expected? If so, go ahead and direct that extra money towards your 401(k) or your IRA to maximize your retirement savings. Did you spend more than anticipated? Go back to your budget and see where adjustments could be made. You may find that you overlooked certain expenses, such as paying off credit card debt or dining out with friends.
After trying out your retirement budget for several months, you’ll likely have a good indication of what you will need to live on during retirement. If you’re financially comfortable after your test drive, that might mean you’re closer than you thought to call yourself a retiree.
Ready to Make Your Retirement Plan Work For You? Check out TFNB's Retirement Savings Opportunities
As you can see, there is no such thing as “one size fits all” when it comes to creating a retirement plan. That’s why at TFNB, we offer a full range of individual retirement accounts to meet your specific needs. Whether you’re looking for a traditional IRA, a Roth IRA, or a special IRA CD, we have your investment options covered.
Stop by one of our locations or reach out to a member of our team to learn how you can start making your retirement plan work for you. No matter your savings goals, we’re here to help you reach a bright financial future. That’s why TFNB is your bank for life.