In order to create a retirement budget, there are several factors to consider beyond just income and expenses. Some of these factors include:
1. Investment strategy and market performance – The amount of money in a retirement account can vary greatly based on investment choices and market performance, particularly during the years leading up to retirement. It’s important to have a clear understanding of these factors and how they may impact overall retirement savings.
2. Taxes – In retirement, taxes become more complex due to the diversification of tax status. This includes income taxes on tax-deferred portfolios, taxes on Social Security benefits, capital gains and income taxes on taxable portfolios, and the need to balance these with untaxed income from Roth portfolios. It’s essential to anticipate these taxes and develop a strategy for making necessary payments.
3. Required minimum distributions (RMDs) – These are the amounts that must be withdrawn from pre-tax portfolios each year starting at age 73 (or age 75 if born after June 30, 1943). This can significantly impact income levels, particularly for those with longer lifespans.
4. Longevity risk – This refers to the possibility of outliving retirement savings and having to rely solely on Social Security in later years. To mitigate this risk, it’s recommended to plan for an even longer retirement than anticipated and reduce spending capacity slightly to ensure a comfortable standard of living throughout the expected lifespan.
5. Inflation – Prices double about every 35 years due to inflation, and this can have a significant impact on those receiving fixed income, such as through low-return investments, pensions, or annuity payments. To prepare for this, it’s important to plan accordingly and ensure that the budget doesn’t become tighter as income remains the same.
6. Insurance needs – Retiring often involves starting to plan for higher healthcare costs as life progresses. Structural costs like gap and long-term care insurance should be accounted for to avoid surprises.
By taking into consideration all of these factors, individuals can develop a comprehensive retirement plan that effectively manages income, expenses, and potential risks. Working with a financial advisor can also provide additional support and guidance in developing a retirement budget that is tailored to individual needs and circumstances.
Leave a Reply