Covering Your Monthly Expenses in Retirement: Estimate Them, Then Secure Your Income
The best way to make sure you have enough money to last you through retirement is to focus on the income you need to support yourself, rather than the "magic number" you’d need to save.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
How much money do you need to save for retirement? If you’re trying to calculate a dollar amount, you’re probably not looking at it the right way.
It’s hard to know how long a certain sum will last because of so many unknowns. Two variables are future inflation rates and how much you’ll earn on your money during retirement. And the biggest unknown is how long you (and your spouse, if you’re married) will live.
So, instead of trying to calculate a lump sum, it’s better to gauge how much monthly income you’ll need, no matter how long you’ll live. That approach reduces the number of unpredictable variables in your planning.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
First, estimate your monthly expenses in retirement. Some rough guidelines say you’ll need about 60% to 80% of your preretirement income.
However, you can get a more personalized number by adding up key monthly expenses, such as housing, food, utilities, insurance, transportation, and whatever other items you’ll need. Try to estimate how these costs may change in the future.
Next, estimate your monthly retirement income from Social Security, pension(s) if you have any, savings and other sources if any.
A good quick online calculator is the Retirement Income Security Evaluation (RISE) Score. It takes about 10 minutes to fill in the numbers and complete.
If your monthly expenses exceed your expected income, you’ll need to figure out ways to bring them into balance. Delaying Social Security payments, as we’ll see below, is one way to boost retirement income. An annuity can also help.
Retirement income can be put roughly into three buckets:
Variable income
This is income generated by savings and investments. The amount will vary because you can expect to spend down your savings (including IRAs and 401(k) accounts) during retirement. Lower savings balances will produce less income. Additionally, returns and interest rates will vary in the future.
Guaranteed level lifetime income
Most traditional employer-provided pensions provide a set monthly benefit that’s guaranteed for life but will never increase. These pensions may also pay a full or partial benefit to a surviving spouse.
Basic lifetime income annuities also usually pay an unchanging monthly amount. Income annuities are contracts sold by insurance companies. They convert your savings into a stream of income for a lifetime or a certain term. Income annuities can cover one person or both spouses.
Guaranteed lifetime income that increases
Social Security benefits are adjusted upward annually for inflation. That makes them uniquely valuable.
It’s important to remember that if both spouses have substantial earnings over a lifetime, the death of one usually results in a significant drop in Social Security income.
Additionally, many lifetime income annuities offer an optional cost-of-living rider that ensures an increasing stream of income in the future. However, there is a cost, in that initial payments are lower than they would be with an annuity without the feature. If you live long enough, you’ll come out ahead.
A way to delay taking Social Security and increase monthly benefits
If you can afford to wait until age 70 to start receiving benefits, you’ll get higher payments. For example, you’d receive about 76% more a month by starting at age 70 than you would if you started at 62. Starting at age 70 gives you about 28% more a month than starting at 66½.
Delaying has another benefit: future inflation adjustments will be bigger, because your base benefit is larger.
The downside is that you forgo payments for several years. Delaying Social Security is a bet that you’ll live a long life.
Many people can’t afford to delay taking Social Security. An immediate income annuity offers one way to plug the income gap.
If you have sufficient savings, you could buy an eight-year immediate annuity at age 62. (This is also called a period certain annuity.) That income could allow you to delay starting Social Security for eight years when your Social Security benefits will be maximized.
You could also delay taking Social Security by, say, five years, from 65 to 70, or 63 to 68, or whatever period makes the most sense for you. The shorter the period you want to cover, the less money you’d need to deposit in an annuity to produce the same income.
-
Nasdaq Leads a Rocky Risk-On Rally: Stock Market TodayAnother worrying bout of late-session weakness couldn't take down the main equity indexes on Wednesday.
-
Quiz: Do You Know How to Avoid the "Medigap Trap?"Quiz Test your basic knowledge of the "Medigap Trap" in our quick quiz.
-
5 Top Tax-Efficient Mutual Funds for Smarter InvestingMutual funds are many things, but "tax-friendly" usually isn't one of them. These are the exceptions.
-
Social Security Break-Even Math Is Helpful, But Don't Let It Dictate When You'll FileYour Social Security break-even age tells you how long you'd need to live for delaying to pay off, but shouldn't be the sole basis for deciding when to claim.
-
I'm a Wealth Adviser Obsessed With Mahjong: Here Are 8 Ways It Can Teach Us How to Manage Our MoneyThis increasingly popular Chinese game can teach us not only how to help manage our money but also how important it is to connect with other people.
-
Global Uncertainty Has Investors Running Scared: This Is How Advisers Can Reassure ThemHow can advisers reassure clients nervous about their plans in an increasingly complex and rapidly changing world? This conversational framework provides the key.
-
Should You Jump on the Roth Conversion Bandwagon? A Financial Adviser Weighs InRoth conversions are all the rage, but what works well for one household can cause financial strain for another. This is what you should consider before moving ahead.
-
The 8 Stages of Retirement: An Expert Guide to Confidence, Flexibility and Fulfillment, From a Financial PlannerRetirement planning is less about hitting a "magic number" and more about an intentional journey — from understanding your relationship with money to preparing for your final legacy.
-
5 Mistakes to Avoid in the 5 Years Before You Retire, From a Financial PlannerWhen retirement is in reach, financial planning gets serious — and there's a heightened risk of making serious mistakes, too. Here are five common slipups.
-
I'm a Financial Planner: This Retirement Strategy Helps Plot a Stress-Free Path to Cash FlowDividing funds into a safety bucket, an income bucket and a growth bucket can help to cover immediate expenses, manage cash flow and promote growth.
-
Your Most Overlooked Retirement Investment: Luxuriating in Doing NothingWhen you take the time to rest and breathe, your brain starts to focus on what matters most in your new stage of life.
