Five Strategic Budgeting Steps for Achieving Your Retirement Savings Goals

Retirement plan dayton, ohio

As you edge closer to retirement, typically a year or two away, the urgency to finalize your financial plans becomes paramount. This period in your pre-retirement journey is crucial. You must tighten your financial grip and ensure you have a solid strategy.

The process might feel overwhelming. But, with careful planning and focused budgeting, you can move into retirement with confidence.

In this blog post, we will guide you through five strategic budgeting steps. They are tailored for those nearing retirement. These steps refine your financial strategy. They help you optimize your savings. They ensure you are fully prepared to enjoy a secure and rewarding retirement. Do these actions. They will strengthen your finances. Then, you can look forward to retirement with peace.

Key Takeaways

Retirement planning has a sequence of logical steps to follow:

Estimate your full income need
Calculate expected income sources
Set total savings goals
Budget and save 15% or more
Invest wisely for compound growth

This in-depth guide will walk through the key aspects of budgeting for retirement in 5 straightforward steps:

Step 1: Calculate Your Retirement Income Needs

The foundation of any retirement plan is having a clear idea of how much annual income you'll require to maintain your desired lifestyle. This varies based on factors like:

The age you plan to retire
Expected regular living expenses
Healthcare and insurance costs
Savings goals and estimated one-time costs
Desired vacations, travel or big purchases

As a general guideline, you'll likely need between 70-85% of your current annual pre-retirement income to maintain a comparable standard of living. However, your specific needs depend greatly on your situation.

Some useful benchmarks:

Most financial advisors suggest around 80% of your current income as a retirement income goal. Some expenses might go away like commuting costs but other expenses, like travel, might go up.
Budget $6,000-$8,000 per person per year for healthcare spending
Depending on when you retire, retirement can last for more than 25 years. Be sure to plan for the possibility of a long life!

Do the math to calculate your annual retirement costs, then multiply by your realistic number of retirement years. This is your total retirement income need.

Annual Income Goal 
x 
Number of Years in Retirement
=
Total Retirement Income Needs

Having an estimate here is crucial — without it, saving and planning is guesswork.

Step 2: Estimate Your Expected Guaranteed Retirement Income Sources

Once you know how much total income you'll require in retirement, determine which sources will contribute towards that number.

Common retirement income sources include:

Social Security Benefits - Estimate your Social Security payment using SSA's retirement calculator. The average monthly benefit as of 2024 is $1,907.
401(k) / IRA Savings - Project your account balances at retirement age assuming steady contributions and reasonable growth over time.
Company Pensions - If you have a defined-benefit pension, calculate the monthly or annual payment amounts.
Part Time Work - Consider income from post-retirement side jobs if applicable.

Calculate the annual total expected from all of these reliable sources. This is your projected baseline retirement income.

Shortfall = Total Needed Income – Projected Reliable Income

If you have a shortfall between needed income and expected sources, don't worry! The next steps will cover how to close the gap.

Step 3: Determine Retirement Savings Goals

Now that you know precisely how much retirement income you need, and what you can count on from predictable sources like Social Security and pensions, the next step is to set tangible goals for your personal retirement savings.

Aim to accumulate enough in investments over time to cover the calculated income shortfall.

But how much money does that require saving? Here is a simple formula to figure out your total nest egg target amount:

Annual Retirement Income Shortfall Amount
÷ Withdrawal Rate Percentage 

= Total Retirement Savings Goal

Most retirement planning uses a safe withdrawal rate between 4-5.5%. This rate lets you take money from savings each year while preserving the principle

For example, with a 4% rate, you could withdraw $40,000 per year from a $1,000,000 savings without depleting it too quickly.

Use the more conservative end for projections — 3% or 3.5% are common.

Plugging in real numbers for income needs, expected income sources, and withdrawal rate gives you a working goal for the total dollar amount to accumulate in your retirement accounts by the time your retire.

In our firm, we enhance this planning process by using a strategy called "retirement income guardrails" with our clients. This approach involves setting upper and lower limits on your spending based on the performance of your investments and changes in your personal situation. By establishing these guardrails, we help you adjust your withdrawals in response to market fluctuations, ensuring that your retirement plan remains on track.

This dynamic approach provides flexibility and peace of mind, allowing you to enjoy your retirement with confidence, knowing that your financial strategy is designed to withstand various economic conditions.

The guardrails ensure you can maintain your desired lifestyle without running the risk of depleting your savings prematurely, providing an additional layer of security to your retirement plan.

Getting to a target savings figure may require some additional planning, which leads to step 4...

Step 4: Start Budgeting and Save Consistently

You have laid the groundwork, now it's time to spring into action!

The fact is reaching retirement goals requires discipline on two fronts — systematic monthly saving, and budgeting to maximize savings capacity.

Retirement Savings Budget Percentage

As a rule of thumb, aim to save 10-15% of your gross annual income towards retirement starting as early as possible in your working years. This steady savings rate, when combined with compound growth in your investment accounts over multiple decades, can build significant wealth.

Of course, not everyone can start at 10-15%. Begin with whatever amount you can afford, even if just 5% or so. Then try to increase the percentage 1% at a time over your career as finances allow.

Any amount put away regularly is better than nothing! Small differences compound substantially over a 30-40 year time horizon.

Employer Retirement Accounts

Take full advantage of tax-deferred savings plans like 401(k)s and 403(b)s if your employer offers matching contributions. This is free extra money towards retirement that shouldn't be left on the table.

Contribute at least enough to claim the full company match before prioritizing other saving goals.

IRAs

Additionally consider opening a Traditional or Roth IRA if you want extra flexibility or investment options beyond your workplace plan. The current annual contribution limit is $6,000 plus an extra $1,000 "catch up" deposit for those 50 and older.

Make IRA contributions automatic each month or pay period to enforce disciplined saving.

Budget to Boost Cash Flow

To achieve a 10%+ retirement savings rate, most people need to trim expenses in daily budget categories like food, entertainment, housing, transportation etc. This frees up extra cash to redirect into long term accounts.

Budgeting techniques like the 50/30/20 rule can help guide cost cutting decisions and prioritization in a balanced, realistic manner:

50% of after-tax income covers needs like rent, utilities, groceries.
30% goes towards wants - dining out, hobbies, vacations etc.
20% gets saved for retirement & other financial goals

The percentages serve as a good framework, but can be adjusted based on your unique situation. The key is the hierarchy prioritizing needs first, then savings.

Isolate big expense categories and look for trimming opportunities:

Housing: Get roommates, downsize, or negotiate rent when possible.
Food: Meal plan, limit eating out, buy generic brands at the grocery store.
Transportation: Take public transportation when available, maintain your vehicle well.
Insurance: Shop rates annually and negotiate for discounts.
Utilities: Conserve energy, choose budget providers

Small cutbacks across multiple categories add up tremendously over time. An extra few hundred dollars monthly can make a big difference funneled directly into retirement investments.

Step 5: Invest Retirement Savings Wisely

The money you accumulate for retirement should be invested skillfully to produce compound growth over decades. This results in a chance for far greater wealth compared to just saving cash alone.

Here are smart guidelines for investing retirement money:

Employ Time Horizon Strategies

At the start of your career, retirement is likely 30+ years away. This allows your investments to weather short term volatility.

In the first 10-20 years of your career, consider allocating upwards of 90% into stocks for growth potential while you have time to ride out any dips in the market.

As you enter mid-career and beyond, begin adjusting the portfolio allocation more conservative by blending in some bonds and cash equivalents. This helps reduce sequence of returns risk as retirement nears.

Favor Broad Index Funds

Low-cost, diversified mutual funds and ETFs provide easy access to broad stock and bond market exposure for long term growth. These are preferable to gambling on individual stocks.

Look for index funds with:

Expense ratios below 0.25%, closer to 0.10% is ideal
Exposure to 500+ underlying stocks or bonds

Examples include S&P 500 index funds, total US or global stock market funds, aggregate bond funds, etc.

Rebalance Over Time

Aim to revisit your investment asset allocation at least every few years and rebalance back towards original targets. This sells appreciated assets to buy underperforming ones, promoting disciplined buying low and selling high behavior.

For example, if your original mix was 70% stocks 30% bonds, but after market movement it's now 80/20, you would sell some stocks to get back to 70/30.

With some up front number crunching, then years of consistent saving and growth investing, you CAN build the nest egg needed to achieve retirement goals and financial freedom.

How to Budget For Retirement: Bringing It All Together

After walking through the core aspects of retirement budgeting, you should now have a solid grasp on what's involved. Here's a quick recap:

Assess reliable income - Estimate all guaranteed income streams like Social Security and pensions that will fund a portion of retirement costs.
Understand expenses - Categorize your needs, wants, and wishes. Budgeting is about aligning expenses with income.
Create a retirement budget - With income and cost estimates, build a realistic spending plan you can use year after year in retirement.
Calculate total savings needed - Determine the gap between expenses and reliable income. This defines your target for total self-funded savings to generate remaining income.
Determine a withdrawal rate - Identify the safe percentage that you can withdraw each year from savings to create income without running out.

As we conclude our guide on budgeting for retirement, it's evident that the journey requires thoughtful planning and disciplined execution. By assessing your reliable income, understanding your expenses, creating a comprehensive retirement budget, calculating the total savings required, and determining a safe withdrawal rate, you're setting a solid foundation for your financial future. Remember, the key to a successful retirement plan is not just in meticulous planning but also in its flexible adaptation to life’s inevitable changes. Equipped with these strategies, you are better prepared to enjoy a financially secure and fulfilling retirement.

Frequently Asked Questions

How much do I need to retire comfortably?

While everyone's number is different, a general rule of thumb is to accumulate enough savings to replace about 80% of your current annual pre-retirement income, from all sources like Social Security and personal savings.

When should I start planning for retirement?

Ideally, start budgeting and saving money for retirement as early as possible in your career, even in your 20's or 30's. Consistent saving and compound growth of investments over decades can produce dramatically more retirement wealth compared to waiting.

What percentage of income should go towards retirement savings?

Strive to save 10-15% of your gross salary towards retirement accounts such as 401(k)s and IRAs. Some budgeting frameworks like the 50/30/20 rule allocate 20% towards savings/investing. Start where you can and gradually increase the percentage over time.

What is the safe withdrawal rate in retirement?

Financial advisors caution against withdrawing more than 3.5-5.5% per year from retirement savings to prevent draining your principal too quickly. The "safe withdrawal rate" preserves accounts for an estimated 30 years based on historical market returns. .

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