A significant difference exists between the vision of retirement and its financial realities. While working that 9-to-5 for decades, people sometimes have an idea their golden years will be footloose and fancy-free. They make bucket lists, picture luxurious vacations to exotic places, and imagine the scrimping and saving will be in their rearview. Unfortunately, rarely do working Americans amass enough wealth to throw financial caution to the wind.
The reality is that another type of retirement planning will be needed. After crossing 65 years old, or your target date, seniors will be tasked with stretching their 401(k), Social Security, and savings, among other resources. Given the average American now lives until approximately 80 years old, enjoying your golden years to the fullest calls for smart retirement planning.
Retiring? You Still Need a Budget
Putting yourself in a position to opt out of the workforce probably meant crafting a household budget that assigned salary percentages, or dollar amounts, to specific categories. Retirement accounts with tax incentives and long-term investments help grow the nest egg. But to remain truly comfortable without a weekly paycheck, you’ll need to restructure the way you utilize money. The alternative is going back to work and giving up some of the financial freedom you envisioned.
How Much Should You Have in Savings?
A conventional estimate regarding retirement planning is that Americans should consider budgeting to live on 80 percent of their annual income. If you earned $100,000 before retiring, maintaining your lifestyle calls for upwards of $80,000 going forward.
You should also have 10 years of financial resources at your disposal to live comfortably at the 80 percent metric. This number may be subject to adjustment based on Social Security, pensions, part-time employment, and passive income, among others. Health and cost of living also impact how much you need to save.
Another formula retirement planning gurus use is the so-called “4-percent rule.” Based on relatively simple math, you divide your target annual retirement income by 4 percent. To maintain the same $80,000 income, you’d need a total of $2 million in savings, excluding Social Security or a 401(k). This formula includes people earning 5 percent on their investments after taxes and inflation. This approach also assumes you’ll draw on retirement savings for 30 years. Of course, making strategic retirement planning decisions can make a difference.
Enjoy our budgeting and money-saving tips to maximize your budget by downloading our free guide:
Expenses to Consider When Doing Your Retirement Planning
It’s important to keep in mind that retirement experts base their formulas on the current and projected financial landscape. We’ve all seen a significant change in healthcare expenses over the last two decades. Even now, the federal government is trying to rein in the cost of prescription medications and put caps on drugs for diabetes, among others. The point is that retirement planning requires some flexibility because costs will fluctuate. That being said these rank among the fundamental expenses retirees need to consider.
The rising cost of health insurance poses a significant challenge for retirees. Medicare does not necessarily cover all of the healthcare needs. Unless you also have a healthcare package from your former employer, expect to pay out-of-pocket expenses. The National Council on Aging pegs those 2023 costs at the following.
- Medicare Part A: Unless you had Social Security withheld for 10+ years, hospital insurance could cost $506 monthly with a $1,600 deductible.
- Medicare Part B: This standard medical insurance premium runs $164.90 monthly in 2023 with a $226 annual deductible. After reaching the deductible, users are expected to pay 20 percent out of pocket for services.
- Medicare Advantage: Also known as Part C, this program additionally covers items such as dental and vision. The plan costs $18 per month and many include co-pays.
- Medicare Part D: Standard out-of-pocket costs hover around $31.50 per month with a maximum annual deductible of $505. Part D typically includes co-pays as well.
Eligible retirees can also get wraparound coverage from private insurers. The co-pays involved in Medigap policies vary and the deductible runs upwards of $2,700. As people grow older, they usually tap into healthcare benefits more often. Smart retirement planning emphasizes the importance of coverage and the strong possibility it will continue to rise.
Paying off your primary residence is usually a pre-retirement goal. Those who put that mortgage to bed free up significant revenue for leisure expenses during their golden years. There are also opportunities to downsize, relocate to an area with a lower cost of living, and put the profit to work.
If you are carrying a mortgage, renting, or paying condo association fees, remember to factor the increases in those expenses into your retirement planning budget. And remember to include property taxes and 4 percent for annual maintenance and repairs.
The latest Bureau of Labor Statistics report indicates the average household spends 16 percent of its total income on transportation. Vehicle purchases and insurance make up 9 percent of the cost. Fuel and oil, surprisingly, only comprised 3 percent. If you expect this expense to plummet because you’re no longer commuting to work, think again. Retirees may only experience a 1-percent dip after punching out for the last time.
The way people approach food prices in their retirement planning budgets depends on whether they expect to change their habits. Those who generally bought lunch in a nearby restaurant or ordered Uber eats may see the cost of food tick down slightly. On the other hand, if you decide to explore new restaurants and experience fine cuisine, anticipate the cost of meals to increase.
Many retirees do not necessarily see a significant change in their dining out and supermarket grocery bills. As a quality-of-life issue, how you decide to budget this expense is purely subjective. Eating out has emerged as a form of entertainment in our culture. So why not carve out a little extra space in your food budget for dining out and dessert?
A large part of the retirement dream involves having more time to do things you enjoy. There are plenty of free and inexpensive activities that you didn’t have the bandwidth to try while working full-time. For example, yoga in the park, visiting museums, taking a historic tour, or signing up for a cooking class are things that enhance daily life at a minimal cost.
By that same token, retirees finally have the time to plan extensive vacations and travel. Spending a month in Europe or visiting the Great Wall of China are big-ticket items. It may be worthwhile to carry over your annual family vacation budget and increase it to accommodate travel and entertainment expenses.
6. Miscellaneous Expenses
It’s prudent to exercise flexibility in any retirement planning spreadsheet because you never know what might pique your interest. Don’t let a pre-set budget limit your options. Consider creating a miscellaneous line item to plan for the possibility.
How to Make the Most of Your Retirement Savings with CCCU
Maximizing the money you set aside for retirement doesn’t mean you have to slash spending and go without little extras, travel, and other positive experiences. By applying the same frugal habits that helped build your nest egg, you can make it last.
Consider taking advantage of credit card rewards programs, mileage points, senior discounts, and shopping at wholesale outlets like Costco and Sam’s Club, among others. And now that your lifestyle isn’t quite so hectic, book travel based on reduced rates rather than paying a premium. Anytime you can save money, you stretch retirement savings further.
The CCCU Wealth Management team is here to help you create a financial plan that sets you up for success. Reach your retirement goals, manage your investments, and plan for your family's future with help from an experienced advisor.
For more smart saving and budgeting tips for all ages, review our Budgeting Tips and Tricks: Quick Solutions to Start Saving Today Guide.
Securities are offered through LPL Financial (LPL), a registered broker-dealer (member FINRA/SIPC).
Securities are offered through LPL Financial (LPL), a registered broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Investment advice offered through CCCU Wealth Management Inc, a registered investment advisor and separate entity from LPL Financial. Consolidated Community Credit Union and CCCU Wealth Management are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using CCCU Wealth Management, and may also be employees of Consolidated Community Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Consolidated Community Credit Union or CCCU Wealth Management. Securities and insurance offered through LPL or its affiliates are:
Not Insured by NCUA or Any Other Government Agency | Not Credit Union Guaranteed | Not Credit Union Deposits or Obligations | May Lose Value