Also realize that if you’re already retired, that doesn’t mean you should stop planning for your future. As you go through your retirement years and live through various life changes, you may need to make adjustments to the plan you initially laid out. In other words, you need to always be reevaluating the numbers so you don’t find yourself in an unfavorable financial situation later in life. You always need a “Plan B” in case something happens.
While assessing your ability to live within your means is complicated and challenging at any age, following are six suggestions to make your planning easier.
1. Establish an income budget prior to retirement. Before you can live within your means, you need to know what those means are. Therefore, calculate the amount of money you’ll have at retirement. Include how much monthly income you’ll be receiving from retirement funds, pension plans, savings and checking accounts, real estate investment properties, social security benefits, any inheritance you may be receiving and any other form of income. You want an accurate figure to work with, so don’t leave anything out.
2. Establish a spending budget prior to retirement that’s based on the income budget. Many people believe once they retire, they’ll have very few expenses. As such, they often underestimate the amount of money they’ll need to support their standard of living. They think since they got the kids through college and have finally paid off the mortgage, they’re free and clear of any major financial responsibilities. Additionally, because they’re no longer commuting to work or incurring the usual workday expenses (lunch, dry cleaning, gas, tolls, etc.) they believe they can live comfortably on 50 to 60 percent of their working life income. What they fail to consider, however, is that during retirement, their health care costs will likely rise. Plus, they’re going to want to do something more than just sit at home every day; they’re going to want to travel, pursue hobbies and do things with the grandkids—all of which require money.
According to an AON Consulting and Georgia University study published in 2004, the average person needs 74 to 87 percent of their working income for retirement. Even those figures are conservative, and some studies have suggested that people should plan to need 100 percent of their working income during retirement. The point is, be realistic about your future income needs. Failing to plan accurately is simply planning to fail.
3. Determine when to begin social security. The natural tendency for people is to start social security at age 62. But a smarter move may be to delay benefits until age 66 or even 70. Why? Because the longer you wait to start receiving benefits, the higher those benefits will be. For example, if your benefit at age 62 is $2,000 per month, delaying that benefit to age 66 will increase your amount to $2,720. Waiting until age 70 will increase your monthly amount to $3,672. That monthly increase can certainly impact your ability to live within your means. Additionally, since people are living longer, chances are you’ll need the higher social security benefit in your later years.
4. Review and update your will and/or living trust. Both a will and a living trust dictate how you want your assets to be handled upon your death. The difference is that a living trust avoids probate when you die. Since most people want to be sure their assets go to their surviving spouse and children, living trusts are common. The key is to fully understand how they work. With a living trust, you have the option to make it irrevocable. This may limit the amount of money your surviving spouse is able to receive and negatively impact his or her monthly income. Therefore, make sure your will and/or living trust is planned out the way you want, and understand the impact an irrevocable trust will have on your spouse and heirs.
5. Continue to max out all your retirement plan contributions while working. Don’t fall into the trap of saying, “Why bother saving anything more at this point? I’m just going to pull the money out in a few years or months.” Those final few years or months can add up significantly. Additionally, to fully maximize your contributions and increase your future monthly income, consider working a few more years to boost your retirement portfolio. As long as you’re a wage earner (W2 employee or contract employee/self-employed), you can contribute to your retirement accounts.
6. Review your asset allocation. Determine the amount of market risk you need to take to achieve your future income goals. If your asset allocation is too conservative (bonds and fixed income), inflation may wreak havoc on the account. However, if your asset allocation is too aggressive (stocks), you might not be able to handle a bear market. For most people, somewhere in the middle may be the best option.
Plan your future wisely
Being able to live the lifestyle you want during retirement doesn’t happen by accident. It takes careful financial planning and a commitment to live within whatever means you have. So as you map out your retirement goals, carefully analyze your future financial picture. Doing a little planning today will give you great returns tomorrow.
