Income
When you’re young and working hard, it can be easy to idealize the day you’ll finally be able to retire and enjoy life. But as the date for retirement nears, finances can become more of a concern. The good news is, retirement life is typically a little less expensive. With some careful planning, you can set a budget that will help you sleep at night.
Stephanie Faris
Published October 12th, 2021
Stephanie Faris
•
Published October 12th, 2021
Table of Contents
Key Takeaways
Retiring comfortably is a matter of having enough to fund the lifestyle you hope to lead.
To calculate your retirement outlook, first review your current budget and adjust it for any changes you’ll make after you leave the workforce.
You’ll also need to determine how much income you’ll have, including the Social Security benefits you’ll get.
When you’re young and working hard, it can be easy to idealize the day you’ll finally be able to retire and enjoy life. But as the date for retirement nears, finances can become more of a concern. Even if you’ve set some money aside, the shift from getting a steady paycheck to living on Social Security and retirement savings distributions can feel daunting.
The good news is, retirement life is typically a little less expensive. With some careful planning, you can set a budget that will help you sleep at night.
How Much Will I Need in Retirement?
You’ll find plenty of “rules” stating how much income you’ll need in retirement. But the truth is, your retirement lifestyle will be different from your neighbor’s or coworker’s. It’s important to determine how much you can reasonably live on before following some generic rule.
An important part of retirement lifestyle planning is to look at your current budget. What can you shave off after you’re no longer working? Can you cut back in some areas to compensate for extra spending on things you enjoy, like traveling? Keep in mind you’ll no longer be commuting, and leaving the workforce may mean you probably won’t have to spend as much on clothing or dining out.
How Will I Fund My Retirement Goals?
Living a simple life in retirement means preparing as soon as possible. You should be setting money aside to supplement the Social Security income you’ll receive. You can set up a My Social Security account and estimate your future benefits.
If you’re due a pension, you should be able to get a feel for what you’ll receive each month. As you get closer to your retirement date, those numbers, along with your Social Security estimate, will become more accurate. This can help you determine if you need to throw extra money into an Individual Retirement Account (IRA) or 401(k) to make sure your expenses will be covered.
What Are Unanticipated Expenses in Retirement?
As you’re setting a budget that accounts for retirement lifestyle changes, add a little padding for those unexpected expenses. Here are a few things that could cut into your monthly income once you’re retired:
- Home repairs
- Vehicle repairs
- Uncovered healthcare
- Long-term care for you and/or your spouse
- Child emergencies
- Divorce
- Investment losses
- Loss due to natural disaster
- Victimization by fraud
- Economic downturns leading to inflation
Remember Health Care and Long-term Care Costs
For some retirees, plans for simple living retirement can be easily derailed by health issues. Make sure you know in advance how much Medicare and your Medicare supplement will be. If you have copays and deductibles, be sure to factor medical care into your budget.
Most older adults will need some form of ongoing care before they die. In many cases, this care is short and can even be performed in the home, but it’s an expense worth considering. Even short-term care can cut into your retirement savings.
Everyone's Ideal Lifestyle in Retirement Is Different
The best thing you can do as you're setting up a budget is to plan based on your own retirement style. What do you enjoy doing? How expensive are those hobbies?
Some retirees may even choose to continue to work part-time after retirement. Maybe you’ll sell your crafts on Etsy or work for a local tour company. That’s extra income that some of your peers won’t have. That’s why it’s essential that you calculate your retirement savings, Social Security income, and monthly budget well in advance.
The Rule of 25
Setting up a budget that suits your lifestyle based on income calculations is the best way to plan for retirement. But if you prefer a formula, some experts recommend the “Rule of 25.”
With this rule, you simply multiply your anticipated annual retirement savings withdrawals by 25. If you plan to take $25,000 a year out of your retirement to supplement your Social Security income, for instance, you would multiply 25,000 by 25 to get $625,000. That means you need to have $625,000 in that account by the time you kick off your retirement. This is similar to the commonly used 4% rule.
Final Thoughts
Retiring to a simpler life is the great American dream. But it can be stressful if you don’t have enough money to live comfortably. We recommend working with a certified financial planner who can take a look at your planned lifestyle and make sure you have enough set aside to cover all your retirement plans.
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Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.
Will I Have Enough?
Maintain Your Lifestyle
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Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.
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