Many people spend as much as one-third of their lives in retirement, so it's important to plan carefully for the lifestyle you want.

A general rule of thumb says you will need 70% to 80% of your current annual income each year you are retired in order to maintain your current lifestyle. If your current gross annual income is $100,000, you could need $70,000 to $80,000 per year in retirement.

The income you need can vary widely depending on the retirement lifestyle you choose. Will you stay at home or travel the world? A retirement budget can help you analyze your expected income and expenses.

Determine Your Income

Start by calculating your monthly retirement income, including all of your retirement income sources. These may include:

  • Your 401(k) or other employer retirement plan
  • IRAs
  • Personal retirement savings and investments
  • payments: Social Security sends annual statements of estimated benefits to workers age 25 and older who do not receive payments and have no pending Social Security claims. You can request a statement at any time.
  • Full- or part-time work after retirement

Estimate Your Expenses

The next step is to estimate your retirement expenses. Consider your current expenses and how they may change after you retire. For example, you may spend more on health care as you get older but less on items such as clothing or vehicles.

The following categories may help you estimate your retirement expenses:

  • Taxes (federal and state, real estate, personal property)
  • Real Estate (mortgage payments, insurance, maintenance, second home costs)
  • Utilities (electric, gas, water, trash, phone, cable/satellite/Internet)
  • Vehicles (loan payments, insurance, license, maintenance)
  • Health Care (medical insurance, out-of-pocket costs, prescriptions, glasses, vitamins)
  • Personal Care (toiletries, cosmetics, haircuts)
  • Food (groceries)
  • Clothing (new clothes, laundry soap, dry cleaning, tailoring)
  • Vacations (travel, lodging, food, entertainment, souvenirs)
  • Entertainment (restaurants, tickets, movie rentals, books, CDs)
  • Savings/Contributions (charities, education savings)
  • Memberships/Licenses (golf or health club, social club, professional organization)
  • Miscellaneous (gifts, magazines, newspapers)

Analyzing your retirement income and anticipated spending can help you determine whether your retirement plan is on track for your lifestyle goal. You may want to review the allocation of your personal investments and reallocate your assets if necessary. As with any part of your financial plan, review and update your retirement budget each year (or more often if there is a major change in your life).

Fast Facts

Helpful Hints for Your Retirement Budget:

  • Consider reducing or eliminating debt, such as your mortgage and outstanding balances on credit cards. This can be a crucial step in using your retirement income effectively.
  • Plan how and when you are going to take distributions from your employer's retirement plan or IRA. For example, if you have more than one IRA, you need to decide how you want to divide any distributions you may take among these accounts. When you reach age 70½, you will be required to take the first minimum distribution from your traditional IRA by April of the following year.
  • Review the potential costs of medical and long-term care insurance, since you may no longer be covered by a group plan.
  • Remember to account for any dependent support expenses you may have, including expenses for elder care.
  • Think about updating your vehicle insurance coverage. Your coverage needs may change if you keep an older car or if you plan to drive less.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.