How to Budget for the Retirement Lifestyle You Deserve

A budget for retirement is a continuous process that requires careful planning and constant adjustments. PeopleImages.com - Yuri A/Shutterstock

What does retirement mean to you? For many people, the very word suggests relaxation, travel, and, finally, having time to pursue long-held hobbies. The truth is, a carefree retirement doesn’t just happen. It requires not only careful planning but also a solid budget.

You can think of this as a roadmap to a financially secure and enjoyable retirement. Let’s start creating a budget so that you can live the retirement lifestyle you deserve.

1. Dream Big (But Be Realistic): Define Your Retirement Goals

Before we dive into retirement budgeting, let’s dream a little. I have to throw this in here—when I started dreaming bigger, I’ve been able to save bigger. I’ve been able to think about how to do this and how to set up income streams that will help later on. Just work hard to build your retirement now. I’m still young (enough), but time will run out, so get going on this! Consider asking yourself the following questions for guidance:

• Where do you see yourself living? Do you imagine yourself in a quaint cottage by the sea? What about downsizing to a smaller home closer to family or staying where you are?
• What does your ideal day look like? Have you always wanted to take that pottery class, travel the world, or volunteer at your local animal shelter?
• What kind of lifestyle are you aiming for? Would you rather live a modest, comfortable life or dream of luxurious vacations?

You can create a picture of your ideal retirement by answering these questions. Additionally, they provide a starting point for estimating future costs.

2. Know Where You Stand: Assess Your Current Financial Situation

Now is the time to get real. To do this, let’s examine your current financial situation.

• Income sources. Make a list of all your potential retirement income streams. Any investments, including Social Security, pensions, 401(k)s, IRAs, and other investments in your portfolio, must be included in this category.
• Savings and investments. Find out how much your savings and retirement accounts are worth.
• Expenses. Keep a meticulous record of your current monthly expenses. This includes everything from groceries and utilities to entertainment and dining out.

As a result of this honest assessment, you will be able to see the state of your financial health and identify areas that can be improved.

3. Estimate Your Retirement Expenses: Don’t Forget the Unexpected

As you age, your retirement expenses will likely change from what they are now. To make an informed decision, consider the following:

Housing

• Rent or mortgage payments.
• The cost of property taxes, insurance, and maintenance.
• Costs associated with downsizing or relocating.

Healthcare

• Out-of-pocket expenses and Medicare premiums.
• Long-term care insurance.

Daily Living

• Costs related to groceries, utilities, and transportation (including a car or public transportation).
• Expenses associated with personal care (haircuts, grooming).
• Household expenses, such as cleaning supplies or home repairs.

Leisure and Travel

• Vacations, dining out, entertainment.
• Hobbies and membership expenses, like a gym or club.

Unexpected Costs

• Emergency repairs, medical expenses, or unexpected family expenses

Don’t forget to stay realistic. We often underestimate the costs associated with aging and potential health problems.

4. Taxes: A Big Factor in Your Retirement Income

It is possible for taxes to impact your retirement income significantly. Here are a few tips to help you keep more of your hard-earned money:

Understand Your Income Sources

• Ordinary income. Wages, interest, dividends, short-term capital gains, withdrawals from traditional retirement accounts, and Social Security benefits fall under this category. Depending on the source of income, ordinary income is taxed between 10 percent and 37 percent.
• Long-term capital gains. Generally, these are profits earned from the sale of long-term assets. Generally, they are taxed at lower rates (zero percent, 15 percent, or 20 percent).

Minimize Taxable Income

• Roth conversions. You can convert some of your traditional IRA or 401(k) savings to a Roth IRA. Future withdrawals will be tax-free, but you’ll have to pay taxes on the converted amount upfront.
• Tax-loss harvesting. To offset capital gains, sell investments that have lost value.
• Charitable giving. You may be able to reduce your capital gains tax liability by donating appreciated assets to charity.

Develop a Tax-Efficient Withdrawal Strategy

• Bucket strategy. You can minimize taxes by dividing your retirement savings into buckets (e.g., high-growth, moderate-growth, low-risk).
• Roth ladder. You should withdraw from your Roth IRA first, followed by other accounts, to minimize your taxable income.

Stay Informed

It is important to keep up with changing tax laws. Stay aware of any changes that may impact your retirement income.

Don’t Forget Property Taxes

In retirement, you’ll continue to pay property taxes if you own a home.

Consult a Tax Professional

Personalized tax strategies can be developed, and all tax laws can be adhered to with the help of an experienced advisor.