How much should you save for retirement expenses, and how do you focus on retirement income planning?
That's a worrisome question for a majority of people. More than half don't know the answer, and that leads them to do less than they should to adequately plan for their post-work years. Some even ignore creating a retirement income strategy completely. But a lack of planning today shouldn't lead to a lack of planning for tomorrow. In fact, understanding all the ways you can create retirement income strategies and plan for retirement expenses is the first step.
Retirement Income Planning
In general, retirees can expect to rely on several savings and investment accounts as well as continuing to work to help fund their retirement. Those retirement income categories include:
- Social Security: This is structured as a replacement of a percentage of your pre-retirement income based on lifetime earnings. You may start receiving benefits as early as age 62, although your benefits will increase by 8 percent yearly until age 70 if you delay the age you start receiving funds.
- Traditional Individual Retirement Acount (IRA) or Roth IRA : These individually funded accounts grow tax-deferred. Contributions have an annual limit, but catch-up contributions are allowed for those 50 and older.
- 401ks: Offered by some employers, a 401k plan typically has a component for employers to match a percentage of whatever an employee contributes.
- Pensions: These are created and funded by some employers to provide income for employees who have retired.
- Annuities: Many Americans will retire without knowing whether they will have enough money to cover their expenses. Annuities help them address the risk of outliving their retirement income, so they can enjoy their retirement. Annuities can provide guaranteed lifetime income and are often used by retirees to meet retirement income needs.
- Part-time work: Almost one-third of people over age 65 continue to work part-time. Income can help with expenses and can often provide a sense of purpose, too.
- Life insurance: Proceeds from policies can provide for care and living expenses for those left behind or fund legacy plans for loved ones, causes or organizations.
Retirement Expenses Planning
Planning for retirement expenses can be challenging. By reviewing this list of common retirement expenses you can begin to develop a sense of what your personal cost of living in retirement could look like. It also provides some items you should consider as you develop your retirement budget:
- Housing: Take into account property taxes, insurance, utilities, home repairs and maintenance, and household supplies. Moving to a less-expensive area or downsizing to a smaller home may cut costs, too.
- Transportation: Daily costs in this category may decrease as the need for commutes — or even multiple cars — declines. However, budgets should still include fuel, insurance and maintenance and repairs.
- Healthcare: This category is the only one that tends to increase with age; it encompasses health insurance but not long-term care costs.
- Food: As people age, food expenses decrease with more time to cook at home and fewer people to feed.
- Communications: Retirees need to stay connected with family, friends and current events. Remember to include items such as cellphone service, internet and cable as part of your retirement expenses.
- Cash contributions: Retirees tend to continue budgeting for charitable donations, both in time as well as resources.
- Entertainment: This category may vary depending on the activity of a retiree.