Retirement Planning Basics
Budgeting, Saving, and Investing Wisely for Retirement
Achieving a comfortable retirement requires proactive financial planning to maintain your current standard of living. Here are actionable strategies to budget, save, and invest wisely to meet your retirement goals.
Create a Retirement Budget
Retirement planning is about creating a plan that addresses the needs of your retirement lifestyle. To begin, the first step is to determine how much you currently spend year to year on living expenses. Doing this will give you a starting point in estimating your retirement living budget. One way to calculate this amount is to total all payments from bank accounts for an entire year and subtract all expenses that are reimbursed, money transferred to other accounts, or investments. The yearly total should represent all expenses and obligations that you are currently responsible for and would likely continue to have in retirement. Do not include any obligations that you would not have in retirement such as child support, student loans, or exceptional medical bills. A mortgage may also be omitted from this total if it will be paid off by the time you retire although not property taxes and insurance.
Optimize Your Current Budget
The exercise of reviewing you current payments throughout the year to create a retirement budget is an effective way to optimize your current living expenses. Look for those payments that you can reduce or eliminate altogether. Start by placing your discretionary expenses into categories such as food, clothing, entertainment, and so on. This will help you to identify areas that you can cut back on. Establish a spending limit for each category and track those expenses over the following months. Some other ways to optimize your spending include:
- Focus on eliminating credit card debt and personal loans to free up funds for savings.
- Reduce the number of high-cost items in your home and car categories.
- Consider refinancing to a lower interest rate or downsizing your home to reduce monthly expenses.
Some other suggestions to consider when thinking about a budget for retirement can be found at https://www.annuity.org/retirement/12-essential-planning-strategies/.
Set a Monthly Savings Goal
Your retirement budget and desired retirement age will determine how much you need to save each month to supplement any expected benefits and current investment account balances. You can calculate how much you need to save monthly to meet your retirement target using online calculators such as our Forecasting Dashboard or consulting a financial advisor. You can facilitate meeting these saving goals by:
- Set up automatic transfers to retirement accounts like a 401(k), IRA, or Roth IRA.
- Before investing, ensure 3-6 months of living expenses are saved in an accessible account.
- Contribute enough to your 401(k) to get the full employer match—it’s essentially free money.
- Gradually raise your savings rate whenever you receive a raise or bonus.
In addition, the government provides worksheets to help prepare financially for a successful retirement (see https://www.askebsa.dol.gov/savingsfitness/worksheets) in addition to tools to determine what government benefits you may be eligible for (see https://www.usa.gov/benefit-finder/retirement).
Retirement Timelines
Choosing when to retire is a significant decision that impacts your financial stability, lifestyle, and overall well-being. Below, we explore the advantages and drawbacks of retiring at 60 (early retirement), 67 (traditional retirement age), and 70 (delayed retirement), with examples to illustrate the potential outcomes. These timelines strongly coincide with the Social Security retirement age (see https://www.ssa.gov/benefits/retirement/planner/agereduction.html.)
Early Retirement (Age 60)
Pros
- More Free Time: Retiring early allows you to enjoy hobbies, travel, and time with loved ones while you’re still healthy and active.
- Health Benefits: Reduced stress from leaving the workforce early can improve mental and physical health.
- Opportunity for Second Careers: Some people use early retirement as a chance to start a passion project or part-time work in a new field.
Cons
- Reduced Social Security Benefits: Claiming benefits before full retirement age (67) results in a permanent reduction (up to 30%).
- Longer Retirement Period: You will need more savings to cover potentially 30+ years of retirement expenses.
- Higher Healthcare Costs: Medicare eligibility starts at 65, so you’ll need private health insurance, which can be expensive.
Example:
John retires at 60 with $800,000 saved. He lives very frugally on $55,000 a year and withdraws $40,000 annually (5% withdrawal rate) to supplement his $1,800 monthly social security benefits at age 62. By 80, he may risk running out of money on his very tight budget, especially if investment returns are lower than expected or healthcare costs rise significantly.
Traditional Retirement (Age 67)
Pros
- Full Social Security Benefits: Retiring at the full retirement age ensures you receive 100% of your entitled benefits.
- More Time to Save: Working longer increases retirement savings and may include employer contributions to retirement accounts.
- Medicare Eligibility: Coverage starts at 65, reducing the need for costly private insurance.
Cons
- Less Time for Leisure: Retiring later means fewer active years to enjoy retirement activities.
- Workplace Stress: Prolonged work stress can affect health and well-being.
Example:
Maria retires at 67 with $1 million saved. She withdraws $40,000 annually (4% withdrawal rate) and receives $2,000 monthly from Social Security. Her combined income provides a comfortable lifestyle, and her savings last well into her 90s.
Delayed Retirement (Age 70)
Pros
- Increased Social Security Benefits: Waiting until 70 increases benefits by 8% annually beyond the full retirement age, significantly boosting monthly income.
- Maximized Savings: Delaying withdrawals from retirement accounts allows investments to grow further.
- Shorter Retirement Period: A shorter retirement horizon reduces the risk of depleting savings and is particularly beneficial to those looking to leave a financial legacy.
Cons
- Health Risks: Waiting longer to retire may reduce the time you can enjoy your retirement in good health.
- Opportunity Cost: Working longer may delay personal goals like traveling or spending time with family.
Example:
Susan retires at 70 with $1.5 million saved. She withdraws $60,000 annually (4% withdrawal rate) and receives $3,000 monthly from Social Security. Her higher income allows her to maintain a luxurious lifestyle and leave a financial legacy for her family.
Key Considerations When Choosing a Retirement Age
- Financial Readiness - Are you financially prepared to retire?
- Lifestyle Goals - What are your goals for retirement?
- Health Risks - What are your health risks at this age?
- Economic Outlook - How does the economy look ahead if you will be retiring soon?
Here is what retirement looks like when you deplete your savings and are left only with Social Security benefits. The age at which you run out of funds shows a negative surplus, which is how much you are short of meeting regular living expenses.
Forecast retiring at 60 with $800,000 saved in retirement accounts
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