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How to Budget for Your Retirement Now!
July 3, 2017
Many Americans do not plan for their retirement until it’s too late. Most Americans are too worried about their current financial goals to really think about their long-term financial future.
Most of us are planning financial goals like traveling, buying a home, starting a family, or launching a business and although these seem to be long-term goals, they are not far enough into the future to plan for what may seem to be a very distant time that will have you kicking back enjoying your golden years.
What makes seems to be the most difficult thing for Americans is figuring out how much money you’ll need one day in order to realistically retire. It’s tough to envision what retirement will look like or how much it will cost. Many Americans have no idea where to begin so it makes it difficult to be motivated to save for retirement without a plan.
Many Americans don’t think about saving for their ideal future retirement during their prime working years. However, it should be a priority to save for your retirement as early as possible. Compound interest performs best when you give it time to work for you, but most people wait too long to be able to save the nest egg they really want to have the best retirement as possible.
In order to figure out how much money you’ll need in retirement , you need to decide your retirement goals. You will need to know exactly what you want. What do you want to do, and where do you want to go? type of lifestyle you want will have a big impact on the amount of money you need. You need to envision your retirement and then decide if that goal is realistic. Once you have determined a realistic goal for your future, you will need to determine how much money you will need.
Consider choices that could affect your financial needs:
Maintaining your family home or downsizing to a condo
Staying in your local area or moving to a less expensive area
Traveling (domestically or internationally, frequency of travel, 1st class or coach, etc.)
Donate your time volunteering or investing in hobbies that cost money
Continuing to earn income (part-time work, freelance or consulting, etc.) or rely solely on your retirement savings
You will need to determine if you will continue to work to earn some amount of money, which means you could get away with a smaller nest egg. Some Americans cringe at the thought of not working at all when they retire. Others count the days when they can be completely work free. However, you will need to decide what option is for you because it will determine how much money you will need to finance that kind of retirement lifestyle.
Now You Can Determine Your Retirement Budget!
Now that you have decided what what kind retirement you want, you needs to estimate some of your expenses. Take the time to create a budget that includes the costs you know you’ll need to take care of including living expenses and discretionary spending like travel and treating the grandchildren.
Keep in mind that this budget won’t be 100% accurate. It will serve as a generic budget that will give you an idea of how much retirement will cost monthly.
Your budget should include:
Other Living Expenses (Utilities, Cell Phone, Internet, Transportation, etc)
Hobbies and Activities
If your budget is an average of $5,000 per month ($60,000 per year) and you want to retire at 63 and live until 90, you need to plan for 27 years of these expenses! This means you need $1,620,000 in retirement saving to accommodate your lifestyle. This does not include inflation or other factors that can increase or decrease what you will need to save for retirement. You can also add in 3% inflation per year to help determine a more accurate retirement savings plan..
If you do not know what you need in your retirement budget because you are unsure what your retirement will look like, there are still some other options to help you prepare for your retirement.
Multiply Your Estimated Annual Retirement Budget by 25: Start with how much money you’d like to have each year in retirement, then multiply that number by 25. That’s how much you’ll need in total. Therefore, if you want to have $60,000 per year, you’ll need $1,500,000 saved for retirement.
4% Rule: This allows you to work backward to determine how much you can spend in retirement. It assumes you can reasonably withdraw 4% of your wealth per year in retirement. So if you’re on track to have $1,500,000 saved by the time you retire, you could spend $60,000 per year (1,500,000 x 0.04).
12 Times Your Salary: Let’s assume you need 12 times your ending salary to retire. If you made $125,000 per year before retirement, you need to make sure you had $1,500,000 in the bank before you officially retire. (The problem with this approach is that you have to guess what you think your salary will be when you retire.)
You can also seek out a financial advisor to assist you in determining a retirement budget. They can give you an estimate for retirement, but it may be more accurate than the budget you come up with on your own. Plus, your planner will help you plan for your retirement.
No matter how you do it, determine a retirement budget and create a plan to achieve that goal. Americans should budget for their retirement future in the same way they budget their monthly housing, transportation, food, etc. It is a necessary item and should be treated like one in your budget.