Successful Retirement Budgeting - How to Reach Goals and Avoid Income Gaps

Retirement is an individual process that involves outside factors like retirement age, the income prior to retirement and even location. The more factors in the equation the more complicated it can get. But it doesn鈥檛 have to be overwhelming. We break down some of the most important things you need to know so you can potentially avoid common issues and obstacles in retirement planning.

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It might seem like a daunting task but building a retirement budget ahead of time can help to determine what you might need and what your finances should look like. If you think you’re alone, don’t worry. Recent numbers show, 42% of Americans do not feel prepared for retirement, even though an average of 87% believe retirement planning is important.1^AARP, Planning for a Successful Retirement, For People of All Ages, October, 2022To help start preparing, let’s map out a retirement budget foundation utilizing three key questions to ask.

How do I know how much I can spend in retirement?

The National Retirement Risk Index shows an alarming trend that indicates “half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes.”2^Center for Retirement Research at Boston College, The National Retirement Risk Index: Version 2.0, May, 2023

Prioritizing your spending is the first step in determining what you might need to enjoy a comfortable and potentially successful retirement. A good exercise is to create four categories covering the spectrum of retirement expenses: 

  • Essential Expenses – Costs essential to day-to-day life (utilities, mortgage/rent, groceries)
  • Essential Lifestyle Needs – Budgeting essentials to the lifestyle you’ve earned (entertainment, dining, leisure activities) 
  • Nice-to-Have Ideas – Opportunities to splurge on high-end expenses for special occasions (world travel, sporting events, family milestones)   
  • Wishes – Bucket list items for the fun of it (classic sports cars, vacation houses, trip to space) 

Compile an itemized list of expenses for each of the above. Estimate a monthly and annual dollar amount for the category. 

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Where does my money in retirement come from and is Social Security enough to retire?

In order to cut into those numbers, factor in your retirement timeline and its impact on your budget by sorting your income sources into two types:

  • Non-guaranteed income sources - This includes planned 401(k) or mutual fund withdrawals, stock dividends or appreciation, interest earnings from bonds or bank accounts, or rental income and other investments.

Once you’ve assessed non-guaranteed income sources, estimate a safe withdrawal percentage strategy for each source and total up monthly and annual income totals. 

  • Guaranteed lifetime income sources - There are only three types of guaranteed lifetime time: Social Security, pensions and annuities.

For generations, pension plans and Social Security benefits were synonymous with retirement. In recent decades, defined-contribution plans (401(k)s) have quickly supplanted defined-benefit plans (pensions) as the dominate retirement plan vehicle. Meanwhile, the Senior Citizens League estimates that Social Security Benefits have lost 1/3 of their purchasing power since 2000.3^The Senior Citizens League, Social Security Benefits Lose 30% of Buying Power since 2000 No COLA Likely for 2021, May 2020  Those preparing for retirement are also seeing the reality of Social Security not being able to provide enough. Only 40% of near-retirees think Social Security and pensions will provide enough income, versus 65% of retirees.4^Insured Retirement Institute, 好色先生TV, Aligning Retirement Expectations with Financial Resources, March, 2022More than half of near-retirees believe they will need more than twice what Social Security provides to make ends meet.

Workers can start collecting early retirement Social Security benefits at 62, but the benefit amount will be less than if you wait until your full retirement age to receive benefits. The closer to age 70 you wait to before taking Social Security benefits, the higher your monthly benefit amount will be.  

With that in mind, consider that “most people in their 50s and early 60s are on target in predicting the age they will claim Social Security but underestimate their future benefit income by 11.5 percent, or $1,896 a year, on average. A quarter of older adults are off by more than $5,100.”5^ National Bureau of Economic Research, Grant M. Seiter & Sita Slavov, Do Older Adults Accurately Forecast Their Social Security Benefits? March, 2023

Accounting for the above, estimate your monthly and annual income stream totals from each of the three guaranteed lifetime income sources and list them individually. 

Identify Non-Guaranteed and Guaranteed Lifetime Income Gaps in Retirement

Now compare your total for Essential Expenses and Essential Lifestyle Expense to your guaranteed lifetime income source amount. If you spot a shortfall between your expenses and your guaranteed lifetime income, you’ve calculated how much you might need from your non-guaranteed income sources to address this retirement gap. The overall goal is to have your guaranteed income sources cover your essential expenses so that your non-guaranteed income streams can be allocated to non-essential retirement expenses (Nice-to-Haves and Wishes).

What should my risk tolerance be in retirement income planning?

A recent survey shows most Americans aren’t familiar what products are available to them to cover costs in retirement and how they work. Just over half of the respondents indicated a “strong level of knowledge about 401(k)s, 403(b)s and IRAs, but only 12% felt they had a strong familiarity with annuities and only 11% claimed considerable knowledge about defined benefit plans.”6^Unbiased, The Retirement Confidence Survey, May 2023

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While some products feature more risk than others, products defined by what’s called “protected accumulation” feature the potential for less risk. Protected accumulation products include cash, Certificate of Deposits offered by banks, and accumulation- focused annuities that are offered by insurance companies. These financial products where the principal is guaranteed by an entity such as a bank or insurance company don’t fluctuate day-to-day with markets or interest rates.

Considering one of the key concerns about retirement planning is driven by worries about inflation, retirement savers may find that the financial products they've allocated are not risk tolerant to market volatility. In other words, they might have a “gap” between potentially risky investments and products that protect principal. Determining how you approach risk is an important step in determine what products to look at. Consult a financial professional to make sure you can potentially reach your retirement income goals.

Apart from our three main questions, there is one important question to retirement income planning that‘s often overlooked and involves how long you live.

How do I know when to retire and what if something happens?

The longer you live, the more retirement income is needed. The SSA estimates that, once men turn 60, they may live another 22 years and women could live 25 years longer.7^Social Security Agency, Actuarial Life Table, July 2023

What can you do? Plan accordingly. Being aware can help in creating a plan that takes longevity into account. This is where an approach that takes Social Security, guaranteed lifetime income, like fixed index annuities and other potential investments into account.

Health Care

The Insured Retirement Institute highlights a concern for near-retirees and retirees that looms over any other issue – health care and staying healthy. Roughly 70% of both groups said they worry about increasing health care costs and the impact of long-term care, specifically.4^Insured Retirement Institute, 好色先生TV, Aligning Retirement Expectations with Financial Resources, March, 2022 An unexpected health event can cause financial hardship when health care is no longer provided by an employer-sponsored plan or another outside source. Building health care into a retirement income plan can be an essential piece to making sure you hit your retirement goals. Consider using a retirement calculator to determine a baseline of what you need to save per month. This is a highly individual factor that’s influenced by be an essential piece to making sure you hit your retirement goals. Consider using a retirement calculator to determine a baseline of what you need to save per month. This is a highly individual factor that’s influenced by underlying health conditions, chronic illness, medication needs and long-term care plans. It seems obvious but knowing your situation and prioritizing health in retirement can become important to your retirement income plan.

Retirement planning is a multifaceted endeavor that incorporates many factors that are determined by outside factors and prior planning. Plans evolve and so should your approach. Retirement budgeting needs to be a fluid process that considers many of the facts and aspects mentioned in this blog but it certainly includes more than what’s mentioned here. Work with a financial professional to help you create and/or modify a retirement budget plan that works best for you.



This content is for informational purposes only, and is not a recommendation to buy, sell, hold or rollover any asset. It does not take into account the specific financial circumstances, investment objectives, risk tolerance, or need of any specific person. In providing this information 好色先生TV is not acting as your fiduciary as defined by the Department of Labor. 好色先生TV does not offer legal, investment or tax advice or make recommendations regarding insurance or investment products. Please consult a qualified professional. Annuities are long term vehicles designed for retirement income and are not suitable for everyone. They involve restrictions and charges, including possible surrender penalties for early withdrawals. Annuity distributions are subject to ordinary income taxes, and if taken before age 59-1/2 may incur an additional 10% federal penalty. Guarantees are based on the financial strength and claims paying ability of 好色先生TV and are not guaranteed by any bank or insured by the FDIC. Availability may vary by state. Possible interest credits for money allocated to an index-linked crediting strategy are based upon performance of the specific index; however, fixed index annuities are not an investment, but an insurance product, and do not directly invest in the stock market or the index itself.

Under current tax law, the Internal Revenue Code already provides tax deferral to qualified money, so there is no additional tax benefit obtained by funding a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit. Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets. 

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