Once you determine what you want to do in retirement, you can begin estimating the dollars needed to fund those ambitions. Of course, not all expenses are created equal. Categorizing your anticipated costs can help you to prioritize and compartmentalize. This is essential to your income planning (the practice of drawing on your savings and allotting assets). Some things will simply need to be paid before others. You’ll likely have:
- Essential expenses, such as housing, utilities, food, clothing and basic health care. These are expenses that must be paid.
- Discretionary expenses, including travel, entertainment and gifts. Discretionary expenses can usually be forgone or reduced if necessary.
- One-time expenses, which might include such items as a child’s wedding or a grandchild’s college tuition.
We developed a Retirement Expense Worksheet to help guide you through the process.
Step 3: Assess (How am I doing?)
Now that you have defined what you want to do in retirement and estimated what it may cost, it’s time to see how financially prepared you are for it. Take stock of the income sources you have now or would like to have in retirement. This would include full- or part-time employment, Social Security, pensions, annuities. Also identify investment assets from which you may draw income: company retirement plans, individual retirement accounts (IRAs), taxable investments, deferred annuities, real estate and cash-value life insurance.
BlackRock’s CoRI tool can help you identify how your current accumulated savings may translate into annual income in retirement.
Armed with this knowledge, you’ll be better equipped to close any gap that may exist between your anticipated annual expenses and your estimated annual retirement income. That gap can often be bridged through a well-considered plan to withdraw from your investment portfolio. For more on this topic, including a discussion of withdrawal strategies, check out Paying Yourself Back in Retirement in BlackRock’s Retirement Center.
No one ever said retirement was cheap, but it can be all you wish it to be with proper planning. And by proper, I mean ongoing. Revisiting the steps above with regularity is important. Retirement is a journey, and it’s not without a few forks in the road. Know that your costs will change over time. A conscious awareness of your changing needs is essential to ensuring that your costs don’t outstrip your income down the road … delivering a delayed sticker shock when you can least bear it.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age. You can find more from Rob here.