What Should Be Included In Every Retirement Budget?

Today, you’ll discover what should be included in every retirement budget. When it comes to creating a retirement budget, there are three essential aspects to consider:

1. Income you want
2. Expenses you will have
3. Legacy you will leave

It’s all about the Benjamins

When it comes to the income you’ll want in retirement, most people estimate they’ll need approximately 80 percent of your current income. This number can change depending on the type of retirement you want. If you plan on hanging out at the house, reading a book on your front porch and watching the sun rise each morning… you may be able to live on 50% of your current income. On the other hand, if you plan on traveling lavishly and seeing all the world (and space tourism)has to offer … then you may need more than 100% of your current income. It really depends on what you want to do in retirement. That is why we start with the income you want. Questions to help you pin down the income you:

• Where is my money coming from?
• How much of your income is passive?
• Does my income already account for inflation?

It’s like losing 3% every year

The reason you want to take inflation into consideration is because every ~17 years, inflation will cut your purchasing power in half. In other world, what you could purchase with $100 today, would require $200 in 17 years. Since most of you are going to be retired for longer than 17 years, that means your income needs to be keeping up with inflation so you can maintain your lifestyle throughout retirement. This ultimately means you don’t want to have your money simply sitting in a savings account at the bank earning 0.001%.

You also don’t want your money stuffed into a mattress in your bedroom. You need your money to be growing at a rate that at least keeps up with inflation. The good news is, investments like real estate and the stock market already take inflation into consider. This is largely due to the fact that housing prices and rent go up with inflation… and the companies in the stock market are being valued at prices that takes inflation into consideration.

After you finalize your income, you’ll want to move onto your expenses. Before we get into the details, here are a few questions you’ll want to ask yourself.

1. Are you taking a mortgage or car payment into retirement?
2. Do you plan on large, new purchases purchasing a new vehicle a year before retirement?
3. Are you carrying any credit card or student loan debt?

Where has all the money gone?

As you list all the expenses you will have in retirement, it is a good idea to start with your needs. You need shelter, food and a way to communicate. From there, you can decide whether you need transportation, to pay your debt and any other items that are “deal breakers”.  By deal-breakers, I am referring to things you must have as a part of your retirement. Once you finish your needs, move into your wants. Do you want to travel? Do you want to go back to school or donate to a cause you believe in? What about your children or grandchildren? Do you want to leave a legacy or pay for their college? Whatever you have in the want category, list it here.

The first rule of retirement

The good news is the legacy you’ll leave in most retirement budgets is built into your retirement plan. The only way to ensure you never run out of money is to live on the interest. The reason is simple. If you spend more than your retirement is generating each year, you are going to run out of money at some point in time. For example, if you have $1,000,000 saved in your retirement account and it is generating 5% each year – you can spend $50,000 per year and your retirement balance will never dip below $1,000,000. However, if you spend $100,000 per year, you are spending $50,000 more than you are generating each year.

As a result, your retirement balance is decreasing by $50,000 per year and you will run out of money in 20 years. There is only reason you would consider spending more than what your account generates each year. And that is because you know the exact day you are going to leave this earth. If you know how long you are going to live, then you can spend your account to zero and ride off into the sunset. Since none of us know the day or time, it makes the need for us to live off of the interest our account generates imperative.

How do you want to be remembered?

It’s a good idea to consider what you are going to do with the principle if you are only living on your interest. You want to make sure you set up your legacy ahead of time. Your legacy includes your withdrawal strategy and estate plan. Your estate plan requires you to answer questions like:

1. Do I need a will?
2. Would it be better to have a trust, a living trust, or both?
3. How will my money be taxed as I withdraw it?

Answering these questions will help help ensure your family isn’t fighting over your assets and it will also limit the “long lost family” from showing up after your passing. If you have a will or a trust, you can make sure you are giving to the people and causes you believe in.

Final thoughts

If you’re going to have a prosperous retirement, you need to know your income, expenses and legacy. Your income should be based on a combination of what you make today and the lifestyle you plan to have in retirement. For expenses, what you are going to pay off before you retire and what bills will you continue to pay? Will your change in lifestyle increase or decrease your expenses? If they increase your expenses, then you may need to tweak your income expectations. Finally, your retirement budget needs to take your legacy into consideration. You need to have a tax efficient withdrawal strategy, but you also want to make sure the money you leave behind goes to the right people.

Sources:

Investopedia: How Inflation Impacts Your Savings

Investopedia: Retirement Planning