Nearing Retirement

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Evaluate your retirement expenses and income

Do you know how much money you'll need to save for a comfortable retirement? You should

The rule of thumb suggests planning to live on about 70% to 80% of your current annual income. While that may be fine in some cases, factoring in the rising costs of health care, possible tax hikes, and inflation may push the amount closer to 100%.

Ultimately, your retirement budget is a very personal decision that depends on the type of lifestyle you envision for those years. No matter what, it's best to have a plan in place. Here are ways to get moving on that plan, as well as some tools to help you work out the details.

Estimate your expenses

The first thing to look at when planning a retirement budget is your expenses. Make sure to consider the following:

  • Nondiscretionary spending. This includes your mortgage or rent payments, food, transportation, health care, taxes, insurance premiums, and utility bills.
  • Discretionary spending. This covers items such as travel, hobbies, entertainment, gifts, and charitable donations.
  • Inflation. Although you may have a good idea of what your expenses are now, make sure to account for the likelihood of inflation over the course of your retirement years.
  • Emergency funds. Don't forget about the unexpected. Your emergency cushion should be enough so that you'll feel financially secure if you find yourself in need.

Our worksheet can help you estimate the cost of your expenses in retirement.

Determine your income

Next, identify all sources of income that you'll have when you retire. Some possibilities include:

  • Social Security. The exact amount of your benefit will depend on how long you've worked, how much you've earned, and at what age you start receiving benefits.
  • Pension plan. Most pension plans offer several options for taking distributions. Check with your employer for more information.
  • Retirement portfolio. If you have a 401(k), 403(b), profit-sharing, or money-purchase plan, check with your employer about the various options for withdrawing your money once you retire.
  • Part-time employment. Working part-time in retirement can help pay the bills, but it may also increase your annual income tax bill or push you into a higher tax bracket.
  • Income from fixed annuities. This guaranteed income stream can help minimize your risk of running out of money if you live longer than expected or if the financial markets perform poorly.

Our worksheet can help you estimate your total retirement income

Where do you go from here?

Once you've had the chance to evaluate your expenses and income, you should have a pretty good idea of what your financial health could be like during your retirement years. While some people will find that they have more than enough to live comfortably, others will realize they won't be able to cover their expenses.

By knowing where you stand financially, you can make any necessary adjustments to your planning and determine how much more work you have to do to reach your goal.

 The following chart shows some steps to consider, depending on your circumstances.

If You Have a Surplus

If You Have a Shortfall

Make sure your emergency fund has sufficient reserves. Reduce your expenses.
Reinvest any extra money back into your retirement portfolio. Delay your retirement, or work part-time in retirement.
Save more now by contributing the maximum to your employer plan.
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