Making a retirement budget calls for considering not only income but also expenses. With $2,700 monthly from Social Security and $715,000 in 401(k) accounts invested and distributed conservatively, a couple may be able to expect about $61,000 in annual income. This is close to the annual expense level reported by the average retiree. However, individual retiree couples may have significantly higher or lower expenses based on individual situations. A more customized spending plan might account for past and predicted outlays for major cost categories such as housing, food, transportation, healthcare and taxes. To ensure your retirement budget aligns with your long-term goals and financial situation, schedule a consultation with a qualified financial advisor today.
A retirement budget is an outline of the expenses and income a retiree can expect after leaving the workforce. Creating a retirement budget is a key part of retirement planning. It helps identify potential financial pinches when cash could run short, and accounts for taxes along the way. It can also suggest solutions, such as trimming expenses or increasing income.
The goal of a retirement budget is to balance income and expenses. It should include a cushion of excess income over expenses to help provide for the unexpected. Flexibility is another vital component. No matter how carefully a budget is prepared, it’s a plan subject to modification and not an iron-clad course of action.
Retiree budgets resemble budgets used to plan the financial affairs of businesses, governments and pre-retirement households, but differences exist. Without jobs generating wages and salaries and the possibility of increasing earnings with overtime or bonuses, retirees may have less flexibility with regard to income than people still working. Retirees also generally have lower expenses for common categories such as housing, education, childcare and, of course, retirement saving.
On the income side, Social Security is a central part of most retiree budgets. A $2,700 combined Social Security income is equal to $32,400 in annual income. While there is a chance Social Security benefits will be significantly reduced around 2035, the program’s long history of uninterrupted payments coupled with the government’s taxing authority suggests it is as reliable as any income source including investments. Social Security benefits also adjust annually to reflect cost of living changes, so it’s inflation-protected.
The income potential of $715,000 in 401(k) plans is less clear-cut, but it’s possible to create a generally trustworthy estimate using the 4% rule. This guideline assumes a retiree can withdraw 4% of the principal in a retirement account each year, adjusting annually for inflation, without running out of money for at least 30 years.
