According to the National Council on Aging, nearly 80% of older adults in America do not have the financial resources to pay for long-term care or cover the unexpected expenses that come with aging — that means nearly 47 million Americans are financially unprepared for post-retirement living. And now, with the rapid increase in cost-of-living, it’s more important than ever to plan ahead and budget for the future.
The good news is: The path to financial stability starts with basic money management, and it’s never too late (or early!) to start. Understanding how to set up and use a budget is one of the most important steps you can take to gain better control over your money, which can help maintain your independence for longer and give you the resources you need to age with dignity, agency, and your peace of mind.
Assess Your Current Financial Situation
Understanding your current financial situation is the first step to creating a budget and financial plan that works for you.
- Make a calendar of your income and expenses: Write down all of your current income sources for each month and when you receive them. some text
- This could include Social Security checks, income from pensions or retirement accounts, dividends from any investments, and disability benefits or SNAP payments (if you get these).
- Then add in all of your expenses. Go through your monthly bills and when they’re due, including your mortgage or rent, health insurance and medications, food, utilities, car payment or other transportation costs, and any other fixed expenses.
- Subtracting your monthly expenses from your income will show you how much money you have as disposable income each month so you can budget
- Pro-tip: As you’re going through your expenses, make sure to take note of mandatory expenses versus nice-to-have expenses. This will help you determine what expenses to cut out if you don’t have as much disposable income as you’d like.
- Savings and investments: Review the status of your retirement accounts (401(k), IRA), savings, and investments.
- Net worth calculation: Create an overview of all your assets such as your home, additional properties or businesses, savings, and investments, as well as any liabilities like loans, mortgage, credit card debt to determine your total net worth.
Calculate Your Future Financial Needs
Calculate your future financial needs to estimate how much you need to save each month before retirement.
- Retirement expenses: Estimate your future cost of living, and make sure to take inflation (~2-3% per year) and potential lifestyle changes into account. Your expenses should include housing, food, transportation, travel, and hobbies.
- Health care costs: Plan for increasing health care expenses, including insurance premiums, long-term care, prescription drugs, and out-of-pocket medical expenses.
If you still need help estimating how much to save every month, use AARP’s Nest Egg Calculator to determine how much you should be putting away for retirement.
Make a Plan for How to Receive Your Retirement Income
There are several different streams of income that can help you through your retirement process. Strategically planning out when and how to start receiving them can help you maximize the money you receive.
- Social Security: Determine when to start claiming Social Security benefits. Delaying benefits past the full retirement age can increase your monthly payments. The minimum age to collect retirement benefits is 62, the earliest you can apply is when you reach 61 years and 9 months. Figure out what month you want your social security benefits to kick in and apply for Social Security up to 4 months before that to ensure they have ample time to process your application.
- Pension Plans: If you have a pension, understand the payout options and their long-term impact. Figure out if a lump sum payment or an annuity is best for you.
- Withdrawals from Retirement Accounts: Create a strategy for withdrawing from 401(k), IRA, and other retirement savings accounts. The 4% rule is a common guideline for sustainable withdrawals:some text
- Add up all of your investments, and withdraw 4% of that total during your first year of retirement.
- For each year following, adjust the dollar amount you withdraw to account for inflation.
- Other Income Streams: Calculate any alternative income sources like rental properties, part-time work, or dividend-paying investments.
- Boost your budget with benefits programs: There are nearly 2,000 benefits programs that can help you pay for food, medicine, utilities, and other daily expenses. Visit NCOA’s BenefitsCheckUp to learn more and get connected to programs in your area.
Consider Downsizing
Downsizing — moving from your current home to a smaller one better suited to your needs and budget as you get older — can help maintain that sense of independence while giving you more control over your finances.
Downsizing can give you a much-needed boost to your retirement fund, while allowing you to move to a space that’s more suitable for you as you age, and that requires less maintenance.
Plan How to Pay for Long-Term Care
One of the biggest expenses to consider is the cost of long-term care and health care. Talk to your loved ones about your financial options should the need arise.
- Enroll in long-term care insurance: Evaluate the cost and benefits of long-term care insurance to cover expenses for in-home care, assisted living, or nursing homes. Purchase long-term care insurance while you’re younger and healthier for lower premiums.
- Self-funding: If you prefer to self-fund long-term care, ensure your savings and investments can cover potential costs. The average long-term care costs vary depending on location and the level of care required.
- Family assistance: If family members are part of your care plan, discuss expectations and potential costs, such as lost wages or reduced work hours for caregivers.
Review and Adjust Your Plan Regularly
Once you have an understanding of your current financial standing as well as your ideal budget, consult with a financial planner, estate attorney, or tax advisor to ensure your plan meets your goals and that you’re taking advantage of all available opportunities. Make sure to regularly review and update your financial care plan to account for changes in your health, family circumstances, or market conditions. Learning how to create and manage a budget is a crucial step toward taking control of your finances, helping you maintain your independence longer while ensuring the resources you need to age with dignity and autonomy.
