Retirement planning takes decades of hard work, and most workers race to prepare for their golden years. Only 28% of baby boomers say they are doing a good job of saving for retirement, according to a report by the Insurance Pension Institute, and nearly one-third say they expect to continue working beyond the age of 70.
One of the reasons retirement savings is so challenging is that there are so many factors to consider. How much do you have to save by retirement age? At what age do you plan to retire? How will you cover health care costs? How much will you be able to rely on for Social Security benefits?
It may be great to think of all the factors involved in retirement planning. But there is one move in the money that you may not even think could lead or break your pension.
The key to long-term success: Accurately assessing your annual retirement costs
The basis of retirement planning involves estimating how much you spend each year after you leave your job. It's easy to just wing it here, assuming you spend the same amount as you do now. Many people also suggest that their costs will decrease when they retire, thinking that they will only need about 75% to 80% of their pre-retirement income to cope. For some people this may be true. But it is not for everyone, and underestimating your retirement costs can be detrimental.
For example, say that you currently spend $ 50,000 a year and assume that you will only need 75% of that at retirement – or $ 37,500 a year. If you plan on retirement at around $ 50,000 a year, but in fact end up spending closer to $ 50,000 a year, you may be left with some money at retirement.
You may not notice the effects of the overruns right away if you have a stable retirement fund. After all, if you have hundreds of thousands of dollars in the bank, it may seem that if you spend an extra few thousand dollars a year, it won't matter. But you will start to notice when your savings run dry in the last years of retirement – which is likely when health problems start to cut out and you are most in need of money.
Of course, you won't be able to predict exactly how much you will spend each year in retirement. Even if you create a thorough, detailed plan, unexpected costs will inevitably arise. However, planning as much as possible will help you avoid major financial setbacks in retirement.
How to Create a Detailed Retirement Budget
When planning your retirement expenses, many of your future expenses will be similar to your current ones. You will still have to pay the rent or mortgage, for example, to buy groceries and to account for transportation. But there are some other significant costs that you should consider in your retirement budget.
For example, your healthcare costs are likely to change after you retire. Once you are 65, you will be eligible to enroll in Medicare. This means that if you retire before that age, you will need to find insurance if you are not covered by your former employer. You could do a lot more than when you were hired, which can quickly be eaten into your budget.
Moreover, health insurance is not free, even if you are covered by Medicare. You will still have to pay all the premiums, deductions, commissions, and insurance, and with Original Medicare (or parts A and B) you can also be responsible for other out-of-pocket expenses, such as prescription drugs and routine dental care and visual activities. bang. Before you retire, make sure you can usually expect to spend on healthcare and include these costs in your retirement budget.
Taxes are another important expense to consider. If you are saving your money in a 401 (k) or traditional IRA, you will owe income taxes when you retire. Depending on which tax bracket you fall into, you may owe thousands of dollars a year. And if you don't plan for these expenses in your retirement plan, you may end up spending more than you have to each year.
You may also owe taxes on your social security benefits, depending on how much you earn. To find out if you will pay taxes on your benefits, calculate the "combined income", which is half of the annual benefit amount plus all other retirement income for the year. If your annual combined income is $ 25,000 or more (or $ 34,000 a year for married couples), you may need to pay at least some of your social security taxes.
Considering all these retirement costs as daily living expenses, you can build an in-depth retirement budget to estimate your future expenses. The more accurate you are when estimating these costs, the more prepared you will be for retirement – and the fewer financial surprises you will face down the road.