Retired Now: Round Numbers

This post was part of a series which is now located on the Retirement tab. The series covers:

• The finances of Rachel, a hypothetical retiree, and the decisions she had to make.
• Key goals for any retiree.
• How to estimate a retirement budget.
• Home equity as a retirement asset. 
• A reserve fund during retirement, mostly for medical expenses.
• Annuities that do (or don't) make sense for retirees.
• Managing income and payouts from your retirement savings.

A Rough Budget

To get a rough budget, you'll need to estimate your overall expenses, your sources of income, and how long you need your income to last. The method outlined here is meant to be a first step, an approximation. It will help you judge whether your income may enable you to reach your main goals. It won't answer every question, down to the last dollar. But it's a good start.

Here's an overview of the method, step-by-step. It has five "round numbers" that are close enough for a rough budget.

1. Find Life+6, your life expectancy plus an extra cushion of six years.
2. Use tax returns and account statements from last year, plus the inflation rate for the past 12 months, to estimate your annual expenses this year. This number is what you actually spent last year, including tax payments, but excluding income you saved, all adjusted for current inflation.
3. Find your stable income from Social Security, pensions, income annuities, and reliable work, also adjusted for current inflation. Life+6 plays a part in calculating this number.
4. If your stable income won't cover your annual expenses, find your spending balance. This is the amount available to extract from your spending account. As detailed in Enable Your Accounts, a spending account is a temporary reserve where you manage one or two years of living expenses.
5. If your annual expenses are still not met, calculate the safe payout you can take from your retirement accounts and taxable savings. With Life+6, there's a simple, reasonable way to do this calculation. (Our Safe-Payout calculator does it for you, and offers other options, as well.)

Should you be over 70 years and 6 months of age, and required by the IRS to take minimum distributions from your retirement accounts, these would go to your spending account in step 4, if needed, and next to your safe payout or taxable savings in step 5.

For worked examples of each step, click here to read the full article.