How to approach post-work years with expenses and retirement income planning
How much should you save for retirement expenses, and how do you focus on retirement income planning?
That's a worrisome question for a majority of people. More than half don't know the answer, and that leads them to do less than they should to adequately plan for their post-work years. Some even ignore creating a retirement income strategy completely. But a lack of planning today shouldn't lead to a lack of planning for tomorrow. In fact, understanding all the ways you can create retirement income strategies and plan for retirement expenses is the first step.
Retirement Income Planning
In general, retirees can expect to rely on several savings and investment accounts as well as continuing to work to help fund their retirement. Those retirement income categories include:
- Social Security: This is structured as a replacement of a percentage of your pre-retirement income based on lifetime earnings. You may start receiving benefits as early as age 62, although your benefits will increase by 8 percent yearly until age 70 if you delay the age you start receiving funds.
- Traditional Individual Retirement Acount (IRA) or Roth IRA : These individually funded accounts grow tax-deferred. Contributions have an annual limit, but catch-up contributions are allowed for those 50 and older.
- 401ks: Offered by some employers, a 401k plan typically has a component for employers to match a percentage of whatever an employee contributes.
- Pensions: These are created and funded by some employers to provide income for employees who have retired.
- Annuities: Many Americans will retire without knowing whether they will have enough money to cover their expenses. Annuities help them address the risk of outliving their retirement income, so they can enjoy their retirement. Annuities can provide guaranteed lifetime income and are often used by retirees to meet retirement income needs.
- Part-time work: Almost one-third of people over age 65 continue to work part-time. Income can help with expenses and can often provide a sense of purpose, too.
- Life insurance: Proceeds from policies can provide for care and living expenses for those left behind or fund legacy plans for loved ones, causes or organizations.
Retirement Expenses Planning
Planning for retirement expenses can be challenging. By reviewing this list of common retirement expenses you can begin to develop a sense of what your personal cost of living in retirement could look like. It also provides some items you should consider as you develop your retirement budget:
- Housing: Take into account property taxes, insurance, utilities, home repairs and maintenance, and household supplies. Moving to a less-expensive area or downsizing to a smaller home may cut costs, too.
- Transportation: Daily costs in this category may decrease as the need for commutes — or even multiple cars — declines. However, budgets should still include fuel, insurance and maintenance and repairs.
- Healthcare: This category is the only one that tends to increase with age; it encompasses health insurance but not long-term care costs.
- Food: As people age, food expenses decrease with more time to cook at home and fewer people to feed.
- Communications: Retirees need to stay connected with family, friends and current events. Remember to include items such as cellphone service, internet and cable as part of your retirement expenses.
- Cash contributions: Retirees tend to continue budgeting for charitable donations, both in time as well as resources.
- Entertainment: This category may vary depending on the activity of a retiree.
An Essential Retirement income plan
One source of funds may not be enough to cover all you want to do in your post-work years. Here are some important things to consider.
Retirement income sources
Strive for a mix of investments and savings accounts that supply both guaranteed and flexible income to enable you to budget for fixed and variable expenses.
401k
Offered by some employers, a 401k plan typically has a component for employers to match a percentage of whatever an employee contributes.
Traditional Individual Retirementaccount (IRA) or Roth IRA
These accounts are individually funded and grow tax-deferred. Contributions to them have an annual limit, but catch-up contributions are allowed for those 50 and older.
32% of Americans contribute to a 401k
Social Security
Social Security replaces a percentage of your pre-retirement income based on your lifetime earnings. You may start receiving benefits as early as age 62.
Pensions
These are created and funded by some employers to provide income for employees who have retired.
8%
The yearly increase, until age 70, in Social Securitybenefits if you delay in receiving funds
Annuities
In these accounts, people deposit lump sums, which are in turn managed for growth and provide regular income payments during retirement.
Life insurance
Proceeds from policies can provide for care and living expenses for those left behind or fund legacy plans for loved ones, causes or organizations.
Part-time work
Almost one-third of people over age 65 continue to work part-time. Income can help with expenses and can often provide a sense of purpose, too.
Typical retirement expenses
How much do you need to save and how much will you spend every month in retirement? Recommendations on what you'll need for retirement income vary and range from 55 percent to 80 percent of your pre-retirement income, for example. The categories below from the Bureau of Labor Statistics (BLS) of older Americans (those 55 and above) reflect the spending of many retirees.
Miscellaneous
6%
Some spending may be more flexible and thus easier to reduce over the course of retirement, including items such as apparel, books and education. Consider ways you can reduce fixed expenses (perhaps moving to a more walkable neighborhood) to have more flexibility in your miscellaneous spending.
Cash contributions
5%
Budgeting for charitable donations doesn't stop in retirement. Many are also able to donate time as well as resources to causes that they've long supported. Households contributed over $400 billion to charities in 2017.
Personal insurance
6%
This category also includes any additional insurance, pension costs and contributions to Social Security for income earned. A category decline may be offset by an increase elsewhere.
Entertainment
5%
A more active retirement plan, or even just an uptick in hobbies such as moviegoing, may require an increase in spending in categories such as entertainment. Strive for a balance and use discounts and freebies such as the library when you can.
Healthcare
13%
Healthcare spending, including health insurance, generally increases as people age. This average spending level doesn't include long-term care costs. The average retired couple spends $285,000 on healthcare.
Housing
35%
Expenses in this category include property taxes, insurance, utilities, home repairs and maintenance, and household supplies. Downsizing to a smaller home may cut costs, too. In general, housing costs decrease with age.
Food
14%
Food is an expense category that tends to decrease as people age. The reasons are varied — more time to cook at home and fewer people to feed, for example. BLS data estimates monthly food costs at $483.
Transportation
16%
Some retirees may no longer need multiple cars and may decrease wear, tear and daily costs. However, budgets should still include fuel, insurance and maintenance and repairs. Retirees today travel more, not less; mass transit may help manage transportation costs.
Check the withdrawal rules on any retirement income accounts you have to help better plan your spending. For calculators and more insights, visit statefarm.com/simple-insights.
