Managing your finances during retirement involves juggling your sources of income to make sure you have enough money to live on. It’s a lot like making a quilt: No piece by itself is big enough to keep you warm at night. But properly stitched together, the pieces can provide a lot of comfort.
Unlike a paycheck, which arrives regularly, retirement income arrives on different schedules. Social Security, annuity, and pension payments usually come monthly. Others, like stock dividends, arrive quarterly. Interest on bonds is paid semi-annually. Few, if any payments, are weekly or biweekly, so that means you have to think about balancing the amount coming in to meet your expenses.
As you prepare a retirement budget, you’ll want to take these factors into account:
People who retire in their 60s can expect to live into their 80s. To estimate a retirement income of 80% of your final salary, you have to account for inflation. The number will be higher than 80% of your current income. You have to anticipate changes in Social Security in the future, which means you may get less income from that source. You can’t predict the cost of healthcare insurance or out-of-pocket costs after you retire. There’s a direct relationship between age and health costs: About 7% of Americans between ages 65 and 74 need help in handling the tasks of everyday living. But by age 85 almost 30% do, so factor in long term care costs.
The most revealing thing that projecting your future needs will tell you is how much you will have to add to your retirement accounts each year to produce the income you need to maintain a comfortable life. But projecting future needs emphasizes how important the rate of return is to your retirement assets. In some periods, when investment markets are depressed, you may not achieve adequate growth; especially if markets are down at the time you begin taking income. That’s why, to ensure you’ll have money as long as you need it, the most you should plan to withdraw each year is 3% of your assets.
Contributions from the book Planning Retirement Income in this press release are used with permission from Light Bulb Press.