Budgeting for retirement

Budgeting for retirement

Budgeting for Retirement

You want to allocate money for retirement, but where can you find money in your current budget. Wait, I have a budget? Yeah, you’re going to want to continue reading.

No matter who you talk to, your parents, your financial representative or professional or Pete the Planner, the topic of making a budget to help allocate money for retirement generally breaks down to:

KNOW WHAT YOU ARE SPENDING: Logging all your purchases for at least one month will help you find where your money is going.

CUT DOWN ON YOUR DEBT: High interest credit card debt can put a strain on your budget and your ability to save. One of the highest returns you can make on your money is to pay off a debt on a credit card. The average credit card fixed interest rate for 2020 (as of August 19) was about 16%, according to Bankrate.com.

START AN EMERGENCY FUND: In order to avoid adding future credit card debt, it is important to have an emergency fund of cash to pay for possible job loss or medical emergency.

BUILD YOUR RETIREMENT SAVINGS: It is generally considered easier to contribute money you never see in your bank account. If your workplace has a defined contribution plan (such as a 401(k) plan), you can have money taken out of your paycheck so you don’t have a chance to miss it. Defined contribution plans also decrease the amount of tax you pay now and if your company matches some contributions, it can give you an extra amount of income.

Here are different examples of creating a budget:

EARLY IN CAREER (Hypothetical example)

Monica, 22, started her first post-college job with a salary of $30,000 per year. She has student loan debt and purchased a new car to travel to her new job. She is living at home to save money, but is looking to rent if she can find a roommate. Her new company has a 401(k) plan and will match at 100 percent on her first six percent.

A budget like below would allow Monica to build a nest egg for her future rent needs while showing her how much she could afford, while also getting the most out of her company’s 401(k) plan.

MONTHLY INCOME: About $2,000 in take home pay

MONTHLY FIXED COSTS

Auto loan: $350

Student loan: $250

Emergency fund: $125

Saving for future rent: $400

Gym: $25

IRA/401(k): $150 (6%)

Total: $1300

MONTHLY VARIABLE COSTS

Groceries: $200

Eating out: $200

Entertainment: $100

Gas: $125

Misc.: $75

Total: $700

BUILDING AROUND A FAMILY (Hypothetical example)

Natalie and Anthony are turning 40 and have three kids, ages 14, 12 and 9. Both work and have a combined salary for $110,000. They owe $125,000 on a home they purchased eight years ago on a 30-year mortgage. They started 529 plans for all three children six years ago and have encourage family members to donate in lieu of gifts. Each plan has an average of $7,500 in it. Their goal is to have about $20,000 for each child in the 529 plan.

They have $50,000 in workplace investment plans and would like to have $1.25 million in those plans, along with their no mortgage payment five years before full retirement age. The budget below will make both of those goals, along with the 529 plan possible (assuming 6% rate of return on their investments).

MONTHLY INCOME: About $6,250 in take home pay

MONTHLY FIXED COSTS

Mortgage loan and insurance: $1000

Car payment and insurance: $775

Utilities: $263

Emergency fund: $375

Saving for 529 plan: $450

Workplace retirement plan: $687 (7.5%)

Roth IRA contribution: $200

Family trip fund: $250

Total: $4000

MONTHLY VARIABLE COSTS

Groceries: $1200

Eating out: $300

Entertainment: $200

Gas: $250

Misc.: $300

Total: $2250

GETTING READY FOR RETIREMENT (Hypothetical example)

Alyssa and Xavier are within eight years of full Social Security retirement age. They own their home, worth $225,000, outright and have $425,000 in tax-deferred retirement funds and $125,000 in tax-free withdrawal retirement funds (Roth IRA). They currently have a combined salary of $150,000 and expect to withdraw $80,000 per year to supplement their Social Security funds in retirement. They also want to pay off $25,000 in student loans for their children.

The budget below would allow Alyssa and Xavier to withdraw $80,000 in retirement, while paying off their children’s student loans before reaching full retirement age. They also will have money to allocate to an asset-based long-term care protection.

MONTHLY INCOME: About $8,750 in take home pay

MONTHLY FIXED COSTS

Car payment and insurance: $1000

Utilities: $300

Emergency fund: $450

Student loans: $350

Workplace retirement plan: $2000 (16%)

Roth IRA contribution: $500

Asset-based long-term care insurance: $500

Total: $5100

MONTHLY VARIABLE COSTS

Groceries: $800

Eating out: $750

Entertainment: $500

Gas: $300

Misc.: $1300

Total: $3650

NOTE: Investing involves risk including the potential loss of principal.

LINKS

Cost of Waiting Calculator

Pete the Planner video: Budgeting

Small changes, big savings Calculator

Browser Requirements