Budgeting for Your Retirement Dreams

Most people dream at least a little about retirement. Their retirement dreams are remarkably similar in some ways too. You know, living on the beach somewhere, travelling all over the country or world, sleeping in every morning – leisurely pursuits for sure. But how do you know if you’ll be able to afford those dreams when retirement comes knocking?

For instance, some of us have been saving regularly, even diligently for years. We’ve been trying to build that nest egg so that when the time came, we could pull the plug on the 9-to-5 job and kick back once and for all. We know how much we’ve saved so far and we have a rough idea of how much we’ll have down the road but how will we know for sure that it will be enough?

The thing to do is to build yourself a budget, a retirement budget. It will resemble greatly your normal monthly budget but with some differences. For instance your income will be from much different sources and your expense section will have some new lines in it and will be missing some of the old ones as well.

Gone will be the regular income line; it will be replaced by pension, annuity, and/or Social Security lines. Perhaps your housing mortgage line will be gone because you’re planning to have your house completely paid off by that time. And maybe you’ll have eliminated your credit cards (along with their interest) and replaced them with reloadable prepaid debit cards for your out-of-pocket expenses. In any case, once you have a realistic monthly budget built you’ll have a concrete idea of how much money you’ll need to make it through any given month. Then you turn to your retirement savings and do a little math.

A good rule-of-thumb is that you will only be able to withdraw approximately 4 or 5 percent of your retirement portfolio every year. If you withdraw more, you’ll probably run out of money because your nest egg won’t be able to generate enough interest income to replace it. Divide that 4 or 5 percent by the 12 months in a year and you’ll see just how much of your retirement you’ll truly be able to afford. When I did this exercise a few years ago, I found that I had exactly enough money to retire for one week out of every month. It was pretty eye-opening.

As a result, I adjusted my retirement savings plan and adjusted my thinking to stay in the work force a few years longer than I originally thought I’d have to. I also began planning (in the back of my mind) to start some kind of part-time business to supplement my income during my golden years. I even stopped using my credit cards, started paying them off, and switched over to reloadable debit cards to save a little faster.

Mentally, these weren’t easy adjustments to make but I’m comfortable with them now. I feel like I’m in control and moving down a real path to retirement. My retirement dreams are within my reach; I just have to execute my plan.

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