The first step in saving for retirement is to determine how much of your income you will need in retirement. This can be done by calculating the guaranteed annual income you will receive from Social Security, pensions, and other sources. Then, you can determine how much money you should set aside for discretionary expenses. These can include cable television, gym memberships, magazine subscriptions, and dining out. If you are married, it is a good idea to create a joint retirement budget.
Discretionary spending is the flexible part of the budget
Discretionary spending is the money you spend on things that don’t have to be essential to your life. This includes things like entertainment, hobbies, and vacations. It’s also important to take note of how much money you spend on these types of things. If they’re not essential, you might want to cut them out to make room for more important things.
First, you’ll want to make a budget that reflects your lifestyle and personality. For instance, if you like to go shopping, you’ll want to make sure you have a cushion in the discretionary spending category for this. Also, if you have a family, you’ll want to take into account the personalities of the other members of your household.
Discretionary spending may stay fairly steady while you’re working but you may find that it rises when you’re planning a big trip or house upgrade. You may also find yourself spending more in these categories just before or after retirement.
Calculating guaranteed annual income from Social Security, pensions, and other income sources
Social Security is the main source of retirement income for many Americans, replacing approximately 45% of an average worker’s pre-retirement income. But the Social Security system was never intended to provide all of an individual’s income in retirement. It’s also less generous than the systems of other advanced industrial countries. Furthermore, retirement income replacement rates are declining as the full retirement age increases and Medicare premiums are increasing.
Social Security is the cornerstone of our retirement system and will likely remain the main source of retirement income for most Americans. While the trust fund of Social Security is expected to be solvent until the early 2020s, the U.S. Treasury’s Congressional Budget Office estimates that it will remain solvent until 2052. During this time, pension funds are not expected to provide much relief.
The Social Security system requires all workers to contribute at least 5% of their earnings to the system. However, workers in defined benefit plans can opt to contribute post-tax dollars. In addition, husbands and wives can make additional contributions into their own accounts.
Investing to save for retirement
Investing to save for retirement is a great way to secure a comfortable retirement. The rule of thumb is to save 15% of your income until you reach retirement age. However, most Americans cannot afford to save that much. Investing even a small amount in retirement funds will help you benefit from compounding early on. For example, if you start investing at age 25, you will have a much higher balance in retirement at age 65. In comparison, if you wait until age 35, your retirement balance will be more than $200,000 lower.
Investing to save for retirement can also help you avoid inflation. The historical inflation rate is about 3%. However, that number may be much higher by the time you reach retirement age. Inflation will affect your spending habits and investment returns.
Setting up a retirement budget
When setting up a retirement budget, it’s important to consider all expenses, both mandatory and optional. This will help you determine how much you can live comfortably without straining your budget. If you plan to spend more time traveling, participating in hobbies, or eating out, you may want to adjust your budget accordingly.
The first step in setting up a retirement budget is to calculate your income and expenses. This includes Social Security benefits, withdrawals from retirement accounts, and any side jobs you may have. You should then compare this information to your total expenses. Then, you can figure out how much you can spend each month. Taking a look at your bills in the months leading up to retirement is also helpful.
Your retirement budget should also include fun expenses. These expenses should be planned carefully. The amount you have left over after paying for essential expenses and saving for travel, will determine how much you can spend on other things.