How to Calculate the Cost of Transitioning to Retirement

Budget carefully to ensure a successful retirement.

Many people dream of retirement from the moment they start their first job, but to enjoy a successful and financially secure retirement, you need to do more than dream. Calculating how much you expect to spend in retirement is the best way to ensure that the money you have saved so diligently through the years will last for the rest of your life.

Instructions

1. Review your budget to determine which expenses will go away or shrink when you retire. These include work clothing, lunches with co-workers and the cost of commuting. Remove these items from your monthly budget.

2. Determine which expenses are likely to increase in retirement. Your travel budget, for instance, might increase after you retire, especially if you want to travel the country or visit the grandchildren.

3. Add any new expenses you expect to have in retirement. If, for example, you plan to take up a new hobby, include those costs in your budget.

4. Find the bottom-line figure in your budget for what it will cost you to live each month.

5. Determine how much money you will receive in pension and Social Security payments (see Resources). Also include income you expect to be able to generate with your retirement nest egg. To preserve the principal in that account, it is best to withdraw no more than 4 to 5 percent each year. A study published by Yahoo! Finance found that for the years 1926 through 2005, the average sustainable withdrawal rate over a 30-year period was 5.5 percent. Erring on the low side of that average gives retirees the best chance of having their savings last throughout a 30-year retirement.

6. Compare the monthly cost of living in your budget to the amount of income you expect to receive in retirement. Knowing how much is coming in and how much you expect to spend is the best way to transition successfully to the retirement lifestyle you always dreamed about.

7. If you find a gap between the amount you expect to need and the funds you expect to have, scale back your living expenses or look for additional sources of income in retirement. Downsizing to a smaller home, working part time in retirement or staying with your current employer for a few more years can boost your savings and reduce the amount you need to withdraw from your nest egg each month.

References

• Investopedia: Stretch Your Retirement Budget
• Yahoo! Finance: Withdrawal Rates

Resources

• Spreadsheet 123: Retirement Budget Template
• Social Security Benefits Estimate