Step 4: Create a retirement budget
Your budget should include:
- How much money comes in.
- How much will it cost to achieve the goals you identified in Step 1.
- How much debt you have.
Start by tracking your income and expenses for a few months. Next, figure out how much money you’ll need to support the lifestyle you’ve chosen in retirement. (The AARP Retirement Calculator can help.)
You’ll also want to take stock of your investments (Is your portfolio diversified? Are you paying a ton of fees?) and make sure your budget accounts for debt repayment.
As a general rule, you will need 80% of your work income in retirement to maintain your standard of living. Social Security is only meant to replace about 40% of the average retiree’s working income, so you’ll need to build sources of income beyond your benefits. Think of ways to make more money, like getting a part-time job, selling some of your stuff, or downsizing to a smaller home.
Keep in mind that the 80% threshold may not account for additional expenses like travel or entertainment, and discretionary spending tends to be higher in the early years of retirement, when you’re more likely to to be healthy and still eager to go.
Step 5: Determine when to start Social Security
For many seniors, this is the most important decision they will make regarding their finances in retirement. According to a 2021 study by the Social Security Administration, about 1 in 3 Americans age 65 and older depend on Social Security for at least 75% of their income.
The age at which you choose to claim retirement benefits will have a direct impact on the amount you will receive each month. The longer you wait to start receiving Social Security (until age 70), the greater the benefit to you and your family.
How much bigger? You are not eligible for 100% of the benefit calculated from your lifetime earnings history until you reach full retirement age (currently between 66 and 67 , by year of birth). If you apply earlier – the minimum age is 62 – you get between 70% and 99% of your benefit amount.
If you can wait past full retirement age, you will be eligible for deferred retirement credits, which increase your benefit for each month until you reach age 70. Whether you’re married, single, widowed, or divorced, it’s usually beneficial to defer the application.
Step 6: Decide if you want (or need to) work
According to the United States Bureau of Labor Statistics, people 65 and older are the fastest growing age group in the labor force. For many older workers, it’s a classic cost-benefit equation: unless you’re financially ready for life, you’ll either have to spend limited funds or stay in the workforce to some extent. to help you achieve your retirement dreams.
So when setting your retirement goals, consider how long and how long you’ll work.
Don’t wait until you’re retired to make a decision. Take the time now to weigh the pros and cons of continuing to work: Full-time, part-time or freelance? Continue your career or try something new? The sooner you are comfortable with your choices and what they might mean financially, the more secure you will be in planning for your retirement.