A recent survey by the Federal Reserve found that average Americans have saved just over $223,000 as they approach retirement. Just how much money anyone needs to have a secure retirement is based on an individual’s needs, wants, and wishes.
As an exercise, separate your mandatory expenses (needs) from your discretionary expenses (wants and wishes). Mandatory expenses include housing, property taxes, food, transportation, and medical insurance. You will also want to add general living expenses such as utilities, cellphones, and car and home repairs. Expect that health care expenses will increase as you age, and account for that as well.
There’s more: Expenses such as travel, entertainment, hobbies, buying a new car, footing the bill for a wedding, or paying for college tuition all fall into the wants and wishes category. If you still have a mortgage on your home, consider making additional payments each month to pay it off faster. That way, you can free up money for other expenses.
Once you have a handle on your expenses, think about where the money will come from. Add up your pension, Social Security, and other nonportfolio items. Subtract that number from your target annual income to determine how much money you will need to draw from your portfolio accounts, such as your 401(k), Roth individual retirement account, or brokerage accounts. Consider any additional future sources of income, such as selling off your home or working at a part-time job.
What you need to retire
Financial advisers will tell you that the rule of thumb is to have enough cash on hand to cover a year’s worth of retirement expenses plus enough to cover another two to four years of spending needs.
If you have not reached your financial goals as you approach 55, there are steps you can take to catch up:
- Increase your monthly contribution to your IRA or 401(k) retirement plan. Make retirement savings a part of your monthly expenses and contribute consistently every month.
- Consider delaying your retirement for a few more years if possible. This will allow you to earn an income for several more years while decreasing the number of years you will be retired.
- Delay taking your Social Security distribution for as long as possible. This means not taking Social Security benefits until you are age 70, when you will receive the maximum benefit. The average monthly Social Security benefit is about $1,500.
There is no one-size-fits-all solution when it comes to retirement budgets. However, all budgets require thoughtful planning if you want to achieve financial security in retirement. Contact a financial adviser well in advance of retirement so you will be prepared for the next chapter of your life.
If you are nearing retirement, it is time you thought about your estate plan. If you are ready to take the next steps towards securing your financial future, reach out to our office by phone (707-769-9975) or email to see how we can help.
Read more about creating a retirement-friendly budget: https://mackaydressler.com/create-a-retirement-friendly-budget/.
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