Creating Your Retirement Budget

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Retirement will undoubtedly change your spending, but it may not reduce it. Expenses like buying supplies for the classroom out of your own pocket and commuting costs – perhaps even your mortgage payment if you've owned your home for many years – may diminish or disappear completely. But if you're like more than 80% of baby boomers who expect to spend the first five years of retirement traveling, pursuing hobbies and launching new careers, those expenses may be supplanted by new, even larger ones.*

This may come as a shock to educators who have calculated their retirement income needs based on what retirement planning experts have advised for years: retirees will likely need just 70% to 80% of their pre-retirement income to maintain their current lifestyles. Those who plan to be active during the first few golden years may require more than 100% of their pre-retirement income initially.

But keep in mind that once you retire, much of the time you devoted to earning money will be dedicated to spending money: on the golf course, on exotic vacations, on grandchildren. According to Sun Life Financial's survey of 2,000 individuals age 50 and above, most respondents expect to pursue a variety of expensive activities in the first five years of retirement (see chart). Add in rising health care costs, and your retirement income needs may outpace your pre-retirement lifestyle.

You can use the Retirement Expense Calculator to estimate your expenses in retirement.

Live Richly in Retirement

Taking advantage of your 403(b) or 457 plan now can help you prepare for the kind of lifestyle you envision in retirement.

Increase contributions. Raising your contribution not only pads your nest egg and increases the investment's tax-deferred growth potential, it also reduces your current tax bill.

Make catch-up contributions, if eligible. Workers age 50 and older are eligible to contribute up to $5,500 more to their 403(b) and 457 plans in 2013, if allowed by the plan. In addition, eligible 403(b) participants with 15 or more years of full-time service may be able to contribute up to $3,000 more for five years, or a maximum of $15,000.

Eligible 457 participants may be able to defer up to two times the contribution limit in effect for the final three years of service. Employees cannot participate in the 3-year catch-up and the 457 plan age 50+ catch-up during the same tax year.

Review allocations to make sure your portfolio is on track. Take time periodically to rebalance your investment selections so that they accurately reflect your current timeline, risk tolerance and goals.

A Very Active Retirement

Workers ages 50 and older expect to pursue a variety of activities during the first five years of retirement that may push their income needs above the 70% to 80% of pre-retirement income suggested by many experts.*

Activity Pre-retirees who hope to do it in the first five years of retirement
Domestic travel 85%
Hobbies 83%
International travel 82%
Start a new career 81%
Spend more time with family 78%
Launch a business 76%
Volunteer 73%
Go back to school 72%
Purchase a second home 61%

* Source: Sun Life Financial survey, January 2007.