Retirement Income Planning

A solid retirement budget is essential.

While you are working, it is up to you to save for your eventual retirement. But building up that solid nest egg is only half the picture. The other half is determining exactly how much money you can safely withdraw from your nest egg after you cash your last paycheck. Taking the time to build a retirement budget is the best way to prepare for a financially secure post-work life.

Current Budget

You should have a solid retirement budget in place long before you call it a career. Before you know how much you expect to spend in retirement, you have no way of knowing if the nest egg you have already built will be enough to carry you through. You can use your current budget as the basis of your retirement spending plan, but you need to make some adjustments along the way. Some expenses, like lunches out and commuting, may go down. But other expenses, like health care, are likely to go up.

Guaranteed Income

Start your retirement planning by adding up your sources of guaranteed retirement income. These sources might include Social Security, pension payments and annuities. Once you know how much you can expect in guaranteed income, you can determine how much of your monthly income needs to come from your retirement plans.

Retirement Income Calculator

A number of retirement income calculators exist, and you can use those calculators to estimate how much income you can expect to pull from your 401k and IRA once you stop working. It is a good idea to use several different retirement calculators, since each one uses a different formula to determine how much you can safely withdraw without running out of money too early. Many financial experts recommend withdrawing no more than 4 percent during your first year, and then increasing that original amount by the rate of inflation each year.

Making Adjustments

After you compare how much you expect to spend in retirement to how much you can safely withdraw from your retirement plans, you can use that information to make any adjustments you need. If a shortfall exists between what you need to spend and what you can safely take from your 401k and IRA, you might have to make some adjustments, including reducing your spending, working a few more years at your current job or taking a part-time job after you retire.

References

• AARP: Retirement Budget Worksheet