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Question: I am concerned about having enough money to retire. Where do I start?
Answer: As we approach retirement age we are confronted with many challenges and questions about which to stress. Probably the most frequent question in the minds of those contemplating retirement is “Will we have enough money?”
Having just retired myself, I have just gone through this process and I can confirm that there is much planning to be done and the sooner you start the better.
I think the steps in budgeting for retirement are as follows:
1. What do we spend now?
2. How will our spending change after retirement?
3. How much income do we want after retirement?
4. How are we going to generate that income?
For step one, I hope you already have a budget that details what you spend. Even better, maybe you keep all your expenses and income in a computer program such as Microsoft Money or Quicken. If you have no clue, then you will have to get out the checkbook and charge card records for a year and see what you have been spending every month. Don’t forget semi-annual and annual expenses such as car insurance and taxes. Make a budget based on the history.
For step two, take a close look at your budget and see how it will change after retirement. Will you burn less gas or more? Will you eat out more? Do you need as much insurance or a different insurance mix? With less income your tithe may be lower. After this examination adjust your budget to the post retirement stage.
For the next step, decide how much income you want in retirement. Calculate this as a percentage of your budget — say 150 percent of your budget. This allows for surprises and things you forgot. If you set too small an amount you may feel stressed if there are surprise expenses, as there surely will be.
For step four, figure out how you are going to generate that income every month. Start with the estimated Social Security payments for you and your spouse. There is an easy calculator at the Social security.gov website. Add any pension payments you may have and subtract the total from the amount you calculated in step three. The difference will have to come from income from your savings or by drawing down your savings.
This brings up questions such as how much do you want to leave to your children, how long will you live and when will you have to start paying taxes on your retirement money? Unless you are good with money issues, you may need professional help at this point. There are many ways to generate income. Many retirees go with certificates of deposit because they are secure and insured by the government. Bonds also are a frequent choice but are more difficult to understand and can lose principal value when interest rates rise. Dividend stocks can generate more income, but can go down in value.
Remember, failing to plan is planning to fail.
Frank Anderson recently retired and has successfully used this budgeting process for many years.