The closer you get to retirement, the more likely you are to worry about how long your nest egg will last. In a perfect world, you'd live off the interest and dividends while leaving the principal untouched. In reality, you'll probably need to spend down the principal. But, that doesn't mean you can't live comfortably.
Assess Your Situation
A practical starting point for budgeting your nest egg is assessing how much of your current income your nest egg must replace to maintain your current lifestyle. Subtract from your current gross earnings your Social Security and Medicare taxes. You won’t pay them after you retire. Also subtract your 401(k) contributions, as you won't be able to contribute after retirement. The amount left is your net income. Next, subtract your anticipated annual Social Security benefits from your net income. Using a purely hypothetical example, if your gross income is $50,000 and your withholdings are $15,000, you net $35,000. If you anticipate $15,000 yearly from Social Security, subtract that amount from the $35,000 net income. The $20,000 difference is the amount your nest egg must cover if you're to match your current income in retirement.
Determine Your Expenses
Determine how much money you spend by adding your necessary expenses, such as food, clothing, gas, housing, car payments, utilities and taxes. Also total your discretionary spending. Smartphone data plans, vacations, entertainment, leisure shopping and cable TV extras are examples of discretionary items. If your retirement income doesn't cover your expenses, you'll have to reduce your spending or increase your income.
You can cut spending and still maintain an acceptable standard of living. Start with major expenses. Paying off your mortgage before retirement frees a substantial amount of money -- about 25 percent of your gross monthly income, on average. If that's not realistic, or if you rent your home, moving to a less expensive area is another way to save big. Keeping your cars longer can make a substantial difference, too. You could save hundreds by driving your cars until they're too expensive to maintain rather than trading them in every few years.
The most obvious way to boost your income is to work longer. Work until your full Social Security benefits kick in instead of retiring at your minimum retirement age to earn 25 percent more in Social Security benefits, delay withdrawals from your nest egg by a couple of years and come away with additional savings from your salary. You could also save hundreds each month in insurance premiums by working until you're eligible for Medicare. Another option is a reverse mortgage on your home. The reverse mortgage is an equity loan that results in a monthly payout to you. You don't have to repay it until the home stops being your primary residence for one year or you die or sell the home.
Create a Safety Net
Most people underestimate how long they'll live -- and how much money they’ll need to fund their retirements. If you're in your 60s now, statistically you're likely to live into your 80s. If you live to your mid-80s, you have a 50 percent chance of living to age 99, according to Dallas Salisbury, president of the Employee Benefit Research Institute. Assume you'll live to 100 for the sake of retirement planning. You'll also protect yourself by having a cash reserve -- at least a year's worth -- when you retire. In the event of a serious market downturn that coincides with your retirement, you may avoid taking a hit if you can leave your investments alone while you cover your expenses with cash.
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