Understanding a Retirement Budget
Understanding retirement budgets can feel like a dark concept. After all, the goal is to ensure you have enough money to live comfortably until you die. No one knows when they’re going to pass, and most people want to live as long as possible.
It can also be stressful to watch your retirement funds slowly drain if you don’t have a pension. With Social Security, you don’t have to completely rely on your savings. However, your monthly stipend from the government depends on when you file for your Social Security.
With this kind of uncertainty, how can you ensure your retirement is well-prepared? What should you know in advance? Let’s find out.
So long as you’ve paid into Social Security and have reached the government-determined age of retirement (as of 2019, 59 ½ years of age), you can apply for your Social Security benefits.
However, you may not want to apply for them until you’re actually going to retire or until you feel you actually need it. You’ll qualify for higher monthly payments the longer you wait to cash in. This goes up even more for every year you wait after you’ve turned 70 years old.
While you may rely on your Social Security for monthly income, your retirement accounts, like a 401k or Roth IRA, will function as additional income.
Depending on the type of account, you either:
- Paid your taxes on your income before you put the money away, which means the money you take out at retirement age will not be taxed further.
- You set aside the money before you paid taxes, meaning the money did not count towards your overall income for tax purposes. As such, the money you take out will be taxed at a normal income rate.
Either way, this money is often taken out monthly. Make sure you understand the required minimum distributions for these accounts if you’re 70 years or older, so as to withdraw the correct amount, even if you don’t need it. Whatever you don’t use can still sit in your savings or checking accounts.
As Social Security payments are a constant and retirement savings have minimums, it’s not a matter of “how slowly can I take my retirement?” It’s “how can I make the best of the income I have now?”
For the best results, make a spreadsheet to visually follow your budget. Make sure you understand all the fixed expenses you’ll have, what range of variable expenses you expect to have, and how much extra money you’ll spend on yourself or on those around you.
While maintaining savings is still important to be ready for emergencies, like your car breaking down or an unexpected hospital trip, you’ll be in the time of your life that you’ve been saving for.