Creating a budget based on future circumstances can be a challenge. Still, you owe it to yourself to anticipate your income and expenses in retirement and come up with a plan before you have to depend on it.
As with any budget, the first step is to record average monthly expenses for at least four to six months. Separate essentials, including mortgage payments, food, utilities and clothing, from discretionary expenses, such as dining out, vacations and gifts.
Don't forget to include occasional big-ticket items in your tally. Support for adult kids - say, helping them buy a house - is another often-overlooked category, says Judy Lawrence, author of The Budget Kit (Kaplan Publishing) and founder of
moneytracker.com.
Also consider how your expenses might change as you age. You might spend more on travel and less on health care in the first few years of retirement, but a decade or two later it could be the reverse. Or you could pay off your mortgage. (To see how average annual expenditures in different categories change for people in various age groups, go to
tulsaworld.com/agegroupspending.)
Don't base your future budget on today's dollars. At about 3 percent, the long-term average annual inflation rate, a $4,000 annual grocery bill would become a $5,376 bill in 10 years and a $7,224 bill in 20 years.
The retirement savings calculator at
Kiplinger.com can show how a 3-percent annual inflation rate will affect the amount you'll need to save.
To find out whether your income will cover your expenses, add up payouts from pensions and other annuities, Social Security benefits (see "Estimate Your Retirement Benefits" at
tulsaworld.com/ssa), income from investments and distributions from retirement accounts. You must take a minimum annual distribution from traditional IRAs and 401(k)s after age 70 1/2, but you can withdraw more than the minimum. (Roth IRAs do not require a minimum distribution.)
One rule of thumb is to withdraw 4 percent from your total nest egg in the first year after you retire and increase that amount each year by the rate of inflation. Another strategy is to base annual spending on the required minimum distribution rules for a traditional IRA (see IRS Publication 590).
You'll owe income tax on payouts from employer-sponsored pensions and withdrawals from tax-deferred retirement accounts. If you buy an immediate annuity with after-tax dollars, part of each payment will be taxable and part tax-free (the insurance company will tell you what's what).
You'll owe tax on 85 percent of your Social Security benefits if your taxable income, plus half of your benefits, exceeds $34,000 if you're single or $44,000 if married filing jointly.
Jane Bennett Clark is a senior editor at Kiplinger's Personal Finance magazine. Send her a question or comment at
moneypower@kiplinger.com. For more on this and similar money topics, go to
tulsaworld.com/kiplinger.
Retire
Original Print Headline: Create a budget plan in advance
Money Power
As a group, the seven bond mutual funds in the Kiplinger 25 fared slightly better, but still suffered an average loss of 3.1 percent.
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