For many individuals, the primary concern is to save as much money as they can before retirement. After all, the bigger your nest egg, the less likely you’ll run out.
However, even if your retirement accounts are bursting at the seams, budgeting is still a necessity. In many cases, without a budget, you could wind up having to dust off the old resume because your funds are starting to run low.
So, with that in mind, we want to share some budgeting strategies so you can accomplish your goals in retirement. I can assure you that you’ll be delighted you did.
Breaking Your Retirement Into Sections
One of the primary reasons why budgeting during your golden years is so valuable is that you never know how long you’ll need cash for various expenses. Ideally, you can enjoy retirement for decades, racking up memories and experiences until you shuffle off this mortal coil.
Because of this unknown variable, it helps to break down your retirement into chunks. Each chunk requires unique planning and budgeting, which we’ll go over accordingly. While everyone’s needs will be different, the main stages to plan for include:
- Pre-Retirement - Ages 50 to 62
- Early Retirement - Ages 62 to 70
- Mid-Retirement - Ages 70 to 80
- Late Retirement - Age 80 and Beyond
Budgeting for Pre-Retirement: You Still Have Time to Make Plans
Once you become “over the hill” at age 50, retirement is going to be on your mind more and more. However, if you’re not where you want to be yet, don’t panic - you have some time to make adjustments.
The Pre-Retirement stage is one of the most critical because you’re still working. During this phase, these are the budgeting strategies to follow the most.
Social Security Income (SSI)
For many individuals, 62 is the age at which they can start collecting early Social Security benefits. However, it may make more sense to wait since each additional year you forgo Social Security will increase your benefit amount.
For example, the “Full Retirement Age” according to the Social Security Administration is currently 67. However, you can actually let your Social Security benefits accrue all the way up until age 70 before starting it. After 70, though, you don’t accrue additional Social Security benefits, so there’s no point in waiting any longer.
Now is the time to start estimating your SSI monthly payments. You should be working with a financial advisor by this point to determine hard numbers. However, here are some additional factors to consider.
- Spousal Benefits - Your spouse can claim earnings based on your work history, starting at age 62. In some cases, it’s best for one of you to wait until 70, while the other can begin SSI earlier.
- Birth Year - Taking early retirement will reduce your monthly payment, but you could get hit with an additional penalty if you’re born after a specific year. Currently, the cutoff year is 1959, but the Administration adjusts its calculations regularly.
- Working While Receiving Benefits - Because SSI is based on your work history, your payments can be reduced if you take a job during retirement. In most cases, you’ll have to determine your “break-even” number to verify that working will pay enough to offset this loss.
Mortgage and Living Expenses
Ideally, once you retire, you shouldn’t have too much longer on your home’s mortgage. However, if you purchased a house relatively recently or you refinance regularly, then your payments will continue long into retirement.
Beyond the mortgage, consider property taxes as well. These rates typically go up annually as the home appreciates, so be sure to calculate those increases. Even if you pay off the mortgage during retirement, the taxes are never going away.
You’ll also want to calculate your projected monthly bills during retirement. How much are utilities? What about internet, phone, and subscription services? Finally, you’ll need to estimate how much you’ll be spending on food, gas, and entertainment during retirement.
We highly recommend giving yourself a buffer when budgeting for flexible items like groceries or eating out. Fixed expenses are easy to calculate, but the others are always more fluid. So, if you usually spend $150 per week on food, budget for $200, just in case. This way, you have some flexibility when working out your savings plan.
Finally, when talking about a mortgage, consider the possibility of downsizing. Many retirees sell their homes and move into condos, assisted living facilities, or mobile homes. If your retirement plan does include downsizing, consider the following factors:
- How much equity will you have accrued in your home?
- Will you make any profit when selling the property?
- How much would a smaller unit (i.e., condo) be? Can you purchase it outright, or will you need another mortgage?
- What will expenses be like for the smaller unit? For example, condos have monthly HOA fees.
Individual Retirement Accounts (IRAs)
If you’re familiar with traditional IRAs, you should know about required minimum distributions (RMDs). The SECURE Act amended the age you’re forced to start taking them to 72, rather than 70 1/2. So, you probably won’t have to worry about taking money out of your accounts until then unless it’s needed for income.
That being said, what will be your primary source of income during retirement? Social security? Annuities? Stock dividends? You will have to diversify your revenue streams, but one will likely stand out above the rest. If it is your IRAs, don’t forget about taxes.
Roth vs. Traditional IRA
Roth IRAs allow you to withdraw funds tax-free. Before retiring, it may be worth it to roll a portion of your traditional IRA into a Roth. However, when doing this, you’ll have to pay taxes during that fiscal year. Be sure to talk to your advisor to see if it’s worth it or not.
Also, consider how your income level will be adjusted during retirement. Realistically, you may be be in a lower tax bracket once you stop working, which can help you save a lot of money in the long-term.
Early Retirement Planning - What Happens When You Stop Working?
Pre-Retirement was the time to build a comprehensive plan, and early retirement is when that plan will kick in. Beyond the elements we already discussed, be sure to prepare for the following scenarios.
If you’re like most Americans, your health insurance is tied to your job. So, once you stop working, you won’t be covered. That being said, Medicare is designed to assist once that occurs and you are 65 years of age. If you retire prior to 65 though, you will have to pay for health insurance out of pocket...but that’s an entirely different article all on it’s own.
If you’re not familiar, Medicare is split into four parts - A through D. Here is a quick overview of each.
- Part A - Inpatient and hospital coverage for when you need to see a doctor.
- Part B - Outpatient coverage and other medical costs (not prescription drugs, though).
- Part C - If you want more control over premiums and copays, you can sign up for a Medicare Advantage Plan. Part C includes everything listed in A and B, but it’s customizable.
- Part D - This part covers prescription drugs.
You will have to sign up for each part before you retire, so we recommend looking into the various options as soon as possible. Also, there might be a lapse in coverage from when you start retirement to when Medicare kicks in, so be aware of that as well.
Are you over the age of 60? Did you know that healthcare is likely your biggest unknown expense in retirement? Check out our simple 3-step Medicare guide that could save you thousands in surprise medical bills or penalties.
Long-term care insurance is another option if you’re worried about winding up in an assisted living facility. However, these plans are quite expensive, so be sure to weigh the pros and cons before signing up.
Ideally, you will already have life insurance before you retire. However, now that you’re entering your golden years, it can be time to reassess your coverage needs. Here are some factors to consider during early retirement.
- Lowering Your Death Benefit - Presumably, your children are grown and out of the house, which means your spouse shouldn’t have as much of a financial burden when you die. It may be best to reduce your death benefit or eliminate life insurance altogether, so you don’t have to pay as much each month.
- Burial Insurance - If you don’t have life insurance or it will mature soon, you may be wondering if it’s worth it to buy a new policy. While term insurance likely isn’t a good idea at this age, burial insurance could be a smart decision. These plans have various perks that make them attractive, particularly if you’re already over 65.
- What to Do With Your Cash Value - You have several options if you have cash value in your policy. You can withdraw it monthly as annuities, or you can roll it into your death benefit (not always an option, however). Also, some plans enable you to use the funds to pay monthly premiums. This way, you maintain coverage with no out-of-pocket expenses (until the money runs out, that is).
Earning Income During Early Retirement
While you may be counting down the days until you stop working your day job, that doesn’t mean you shouldn’t have any income in retirement. Because you’re still in the early phase of retirement, now is an ideal time to consider alternative revenue streams. Feel free to get creative, such as with these options.
- Rent a Room - Rather than downsize your home, perhaps you could get a tenant or two. Also, becoming an Airbnb host can help you bring in some extra cash while you’re out traveling the world.
- Part-Time Gigs - Driving for Uber or delivering with DoorDash can help you get some side income during these early retirement years. Best of all, you control your schedule, so work as little or as much as you want.
- Short-Term Investments - There are plenty of ways to make your money work harder. Peer-to-peer lending or real estate investing may be feasible options.
Mid-Retirement: How Are Your Accounts Holding Up?
Once you reach mid-retirement, you should have a pretty good idea of how things are going. Your monthly expenses should be stable, as are any revenue streams. Now is the time to talk to your financial advisor to see how well your money will hold up over the next 20 years or so. Here are the top factors to consider during this stage.
Health and Wellness
The closer you get to age 80, the more your body begins to break down. Energy levels start to dip, your bones are much more brittle than they were before, and you can’t do all the things you used to. So, you might be vacationing less and visiting the doctor more.
That being said, now is the time to take action. Mild to moderate exercise can help keep you limber in old age. Start walking more frequently, or take up a hobby that requires movement (i.e., ballroom dancing). This way, you can stave off the worst effects of aging for longer.
You’ll really want to get into this during the final stage of retirement, but it’s never too soon to begin planning. Some elements to think about include:
- Life Insurance Benefits - Who will receive the payout? Do you want the funds to go to the beneficiary directly or into a trust?
- Physical Assets - Whether you have a home or a smaller property, will it be paid off? Who will be responsible for selling the property when you’re gone? What if your children want to move in?
- Roth IRAs - The funds in a Roth account can be passed to an heir. However, he or she will have to withdraw the money within 10 years or roll it into a personal IRA.
Also, consider how these assets may change in the coming years or decades. Will you plan to sell the house if you need physical assistance? Will your IRA still have money by the time you die? What if your life insurance matures and you’re still alive? Is leaving an inheritance important to you, or not as much?
Late Retirement: How Long Will It Last?
According to the U.S. Census, the average duration of retirement is 18 years. So, if you retired at 65, you may only last until age 83. However, with advances in medical science, more and more individuals are living to age 90 and beyond.
So, when talking about budgeting, you’ll need to estimate for various scenarios. Realistically, you should plan for the next 30 years, at least. Beyond that, you can reassess your strategy as needed. Be sure to consider these factors.
- Assisted Living Costs - Many individuals in the over-80 crowd can’t manage on their own. If you’re living in an ALF, how does that impact your monthly expenses? Can a child or relative step in and provide help instead?
- Medical Bills - As you get older, your health will only get worse. Consider how an extended hospital visit (i.e., for a broken hip) can wipe out your savings.
- Estate Planning - Be sure to update your will and any assets regularly.
- Life Insurance - If you don’t have insurance and you want to get a policy, burial insurance is likely your only option. After 85, however, it’s impossible to get coverage.
Contact NextGen Wealth For Retirement Planning and Budgeting
Because there are so many variables to consider, building an accurate budget for retirement can be overwhelming. Fortunately, we’re here to help. At NextGen Wealth, we can assist you every step of the way so you can spend more time enjoying retirement and less time worrying about your money.