Q. I’ve never really kept a budget, but II ‘m planning to retire in two years. What’s the best way to figure out how much I will need each year when I stop working?
A. You can calculate when you can stop working by actually doing that budget.
The good news is that you’re getting a look at your cash needs before you actually retire, said Alison Williams, a certified financial planner with Stonegate Wealth Management in Oakland.
She recommends tracking your expenses.
“A program like Quicken is reasonably priced and will not only allow you to track spending, but also categorize those expenditures,” Williams said.
To develop a budget for your retirement needs, you should start with the “must-haves” of food, housing, transportation and insurance, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.
He recommends adding in a reserve for emergencies that’s worth 5 percent of the total.
Next, consider your “wants,” such as travel, entertaining and hobbies, he said. And don’t forget to budget for gifts and charitable giving.
Medical costs are the biggest unknown in any retirement income plan.
“Remember to budget for Medicare Part B (doctors) and Part D (prescriptions) premiums, as well as a Medicare supplement plan, unless you have a retiree medical plan through an employer,” McCarthy said. “Also give thought to how you will deal with potential long-term care costs.”
Williams agrees that medical costs are essential as advances in medical technology are increasing life expectancy. She says it’s reasonable to believe that with a 65-year-old couple, there is a 50 percent chance one spouse will live until age 90.
Then, he said, you should estimate your income taxes. This will be based on the types and amount of your income in retirement.
Finally, don’t forget the impact of inflation on your budget.
McCarthy said recently, overall inflation has been low by historical standards, but over the next 20-plus years it’s likely to revert to a long-term average closer to 3.25% annually.
And have a long-term look, he said, agreeing that a budget to age 90 is a smart move.
Consider working with a financial advisor if you think you need help. You don’t want to make any big mistakes with your next moves.
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