Budgeting For Retirement – Have You Done Yours?


One of the most important aspects of anyone’s financial health is properly preparing and saving for retirement.  When it comes to saving for retirement, one of the most complicated aspects is knowing how much money you will need to save and how you can go about reaching your goals.

The first step in properly budgeting for retirement is determining how much money you will need during retirement.  As a general rule, most financial experts suggest that you assume that you will need between 80% and 90% of your pre-retirement income during retirement, plus annual inflation.  However, this rule is general and does not take into consideration many things such as whether or not you plan to travel, how much you expect to spend on medical expenses, and whether or not you will still have a mortgage or rent payment.  If you plan on traveling and having an active retirement, then you may need more than 100% of your pre-retirement income.

After determining how much money you will need for retirement, you then need to factor in what sources of income you will have during retirement.  If you have nearing retirement, you should already have a good idea of how much social security and pension you will have during your retirement.  With social security nearing bankruptcy and pension plans being pulled from almost all employers; if you are far from retirement you should do your best to not rely on those sources of income in the future.

Once you have an idea of how much money you will need in retirement and what sources of income you will have, you will be able to determine how much of a shortfall you will need to cover through your own personal savings.  For example, if you earn $100,000 per year and want to spend 90% of your income going forward, you will need at least $90,000 per year.  If you realistically expect to earn $30,000 per year through social security and pension plans, then you will need cover $60,000 per year out of your own savings.  Most retirement experts suggest that retirees withdraw no more than 5% of their retirement balance each year.  Therefore, if you want to be able to withdraw $60,000 per year, you should have at least $1.2 million saved by retirement.  This is calculated as $60,000 divided by 5%.

Once you have a target goal set, you should be better prepared to set up a savings plan.  In all situations, the earlier you start saving, the better off you will be.  This is because the amount of time that your money has to grow is the largest determinant in the final value of the portfolio that you will accumulate.  For example, if you invest $5,000 per year for ten years starting at the age of 20, and then investing at the age of 30, you will have about $1.2 million saved by the time you are 65.  On the other hand, if you start investing at age 30 and invest $5,000 per year until you are 65, you will only have $860k by the time you are 65.

Another concern that many people have is how much they should invest.  While it is always better to save more than less, everyone should aim to save at least 10% of their income into a retirement account.  Retirement accounts, such as 401ks and IRAs, allow your savings to grow tax free, which maximizes your total return.  If you have access to an employer sponsored retirement account, it is always a good idea to enroll.  Often times, these employer sponsored accounts come with employer matches, which is essentially free money provided by your employer.  Through the use of online retirement calculators, you should better be able to determine how much you need to save and at what rate to meet your goals.

Many people are also confused as to what they should invest in.  Most 401k plans come with various funds for you to choose from.  The funds normally range in investment strategy from conservative to aggressive.  As a general rule, the younger you are, the more you should gear your portfolio towards aggressive investments.  While these plans are more risky, they come with far greater reward.  As you age and near retirement, you should shift more and more of your portfolio into conservative investments.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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