How to Fill the Income Gap in Your Retirement Budget

Do you have enough money for retirement?

Worried about your ability to fund your retirement? You’re not alone. According to a recent Gallup survey, more than half of all Americans are concerned about whether they’ll have enough money for retirement.

Couple planning retirement income

It’s an understandable concern. There was a time when retirees could count on reliable income from Social Security and an employer pension. Most retirees still collect Social Security, but pensions have become a rare benefit. Today’s generation of retirees have to fund their cost of living through personal savings, usually in a 401(k) or IRA.\

If you’re approaching retirement, you may be worried that you haven’t saved enough to fund your desired lifestyle. Or you may be concerned that a market downturn could wipe out a portion of your savings and deplete your projected retirement income.

One way to address this concern is to create a projected retirement budget. A budget is always a valuable tool, but it’s especially helpful as you approach retirement. You can use your budget to determine whether you’re on track and to guide your spending.

Unfortunately, most Americans don’t use a budget. A recent study from U.S. Bank found that only 41 percent of households rely on a budget. If you’re among those who don’t use a budget, you may want to adopt one before you retire. It could make all the difference between financial difficulty and stability. Below are a few tips on how you can develop your budget:

Step #1: Estimate your fixed expenses.

You can’t predict exactly what your expenses will be in retirement, but you can probably develop a fairly accurate estimate. Start by making a list of your fixed costs. These are bills that have to be paid every month. They include things like:

  • Mortgage/Rent
  • Utilities
  • Taxes
  • Insurance
  • Car payment
  • Credit Cards
  • Loans
  • And more . . .

Remember to project the amount in retirement. There may be steps you can take between now and retirement to reduce these fixed costs. For example, you could pay off your mortgage or downsize to a smaller home. You could pay off your car or reduce your credit card debt. Think about what these monthly obligations will be after you retire, and then itemize them in your budget.

Step #2: Project your discretionary costs.

The next step is to list your discretionary costs, such as shopping, dining, travel and others. This could be more difficult, because these costs can be unpredictable. It may be helpful to think about what you want your retirement to look like. Do you imagine a retirement filled with shopping, dining out and entertainment? Or do you envision spending time with family and enjoying quiet time at home? Consider how you will spend your free time.

Once you’ve imagined what your retirement will be like, you may be able to project your discretionary costs. Itemize them and add them to your budget. Next, total up your discretionary costs and fixed expenses. The sum is your monthly expense need, which you’ll have to fund with a combination of Social Security, pension, investment withdrawals and other income sources.

Step #3: Overcome your income gap.

Finally, project your guaranteed retirement income. This will likely include Social Security, but it could also include pension benefits. Does your total guaranteed lifetime retirement income cover your projected expenses?

If not, you have an income gap. Your anticipated retirement expenses exceed your guaranteed income. You’ll likely have to take distributions from your savings to cover the gap. While your savings may be sufficient, those withdrawals likely aren’t guaranteed and may fluctuate over time.

You may want to consider using an annuity to eliminate your income gap. Annuities offer a number of ways to convert savings into a guaranteed lifetime income stream. You could use a single premium immediate annuity to give yourself a personal pension. Or you could use a deferred annuity with a guarantee income benefit to provide stable income and growth potential.

At America’s Annuity, we can help you develop your retirement budget and eliminate worry and concern. Let’s talk about your retirement plans and how we can develop a stream of guaranteed lifetime income to fund your cost of living. Let’s connect soon and start the conversation.