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Although your retirement may seem like light years away, it’s wise to create a retirement budget and work with a financial advisor to determine if you’re on track.

Why? Only 33% of retirees feel very confident about having enough money during retirement, according to the 2022 Retirement Confidence Survey. They also found that today’s workers feel behind in retirement savings and are planning on working longer to make up for it. To help you prepare for this important life milestone, here are our tips on how to create a retirement budget.

How Much Does It Cost to Retire?

There are several factors that will affect the amount you personally will need to retire, including the age you retire, your spending habits, and inflation. Another major factor is where you live during retirement. Do some research to find out the average amount needed to retire in your state, including annual living expenses. This information can be a good baseline to see if you are saving enough money in your 401(k), IRA or other savings accounts.

Retirement Budget Example

To make sure you have enough money to retire, you’ll want to create a retirement budget. The first step is to determine what money will be coming in during your retirement years. Financial advisors, like the ones at First American Bank, recommend having more than one source of income during retirement. An average retirement budget may consist of the following categories:

  • Earned income: The Social Security Administration defines income as any cash that is received or given in-kind that pays for food and shelter, like wages from a part-time job.
  • Unearned income: This category consists of any payments you receive like Social Security, pensions or annuities, other benefits from the government like unemployment or disability, and any interest income from savings accounts, CDs or investments.

The next step in planning a retirement budget is to figure out what expenses you’ll likely have during retirement. We recommend looking at your last 6 to 12 months' worth of bank account and credit card statements, as well as last year’s tax returns. Having copies of your most recent pay stubs can be helpful for reference as well. Then, group your expenses by type. Here are typical retirement budget categories that you can use to create your retirement budget spreadsheet:

  • Housing: This should include your mortgage or rent, property taxes, insurance, utilities, any condo fees or other fees that may apply.
  • Food & Entertainment: Estimate your monthly grocery shopping bill, any restaurants you may frequent, and other fun things you may do for entertainment, which could include cable TV and/or internet, memberships (gyms, online gathering places, warehouse clubs), and even vacations.
  • Personal Care: Add up what you will expect to spend on clothing and other personal care items.
  • Getting Around: In the transportation category, calculate your costs around your vehicle payments, auto insurance, gas, vehicle registration, or public transportation fares.
  • Healthcare: Factor in the possibility of healthcare costs changes, especially between ages 60-65, when you become eligible for Medicare. Add in more than you think in that category, and consider dental, vision, and auditory care as well. Give yourself an emergency bucket as well. Healthcare is the biggest factor that can make or break a budget because this is the largest expense category in retirement given the average retirement age.
  • Charity and Gifts: Most people feel compelled to give back to their communities when they are older. If tithing, donating to charity or gifting (spoiling the grandkids!) will be part of your life, add this into your budget.
  • Emergency Savings: Things go wrong all the time. That’s why you want to stash some extra savings away for a rainy day to fix broken appliances, cars or technology.
Having a budget for retirement will help you get a clear picture of the amount of money you’ll need to live out your golden years and give you a better idea of what you should be saving today. First American Bank has several ways to help you save for retirement, including high-interest savings accounts, CDs or Money Market Accounts, IRAs, as well as a dedicated Wealth Management team.

Use our Retirement Calculator to see how far your nest egg will take you for a quick snapshot. You can also use our Social Security Benefits Calculator to get an idea of your monthly Social Security benefits. To get a personalized retirement plan, contact our Wealth Management Group to set up an appointment. We have served Illinois, Wisconsin, Florida and beyond for over 50 years.

First American Bank investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value. For information purposes only and not intended to provide legal, tax or accounting advice.