This move of 1 money could make or break your retirement

Planning for retirement requires decades of hard work, and most workers struggle to prepare for their golden age. According to a report from the Insured Retirement Institute, only 28% of baby boomers think they're saving for their retirement, and nearly a third of them plan to continue working after the age of 70 years.

One of the reasons why saving for retirement is so difficult is that there are so many factors to take into account. How much should you save by retirement age? At what age do you plan to retire? How will you cover health expenses? How far can you rely on social security benefits?

It can be difficult to think of all the factors involved in retirement planning. But you can not even think that it could make or break your retirement.

Source of the image: Getty Images.

The key to long-term success: accurately estimate the costs of your annual retirement

Retirement planning is based on estimating how much you will spend each year once you leave your job. It's easy to just go here, assuming you spend about the same amount you are now. Many people also think that their costs will decline in retirement, thinking that they will only need about 75% to 80% of their pre-retirement income to get out of it. For some people, this may be true. But this is not the case for everyone, and underestimating your retirement costs can be detrimental.

For example, suppose you are currently spending $ 50,000 a year and assuming you will only need 75% at retirement, or $ 37,500 a year. If you plan your retirement with only $ 37,500 a year but end up spending close to $ 50,000 a year, you may run out of money at some point in your retirement.

You may not immediately notice the effects of excessive spending if you have a solid retirement fund. After all, if you have hundreds of thousands of dollars in the bank, it may seem that spending a few thousand dollars more a year will not change anything. But you will begin to notice that your savings will run out during your last years of retirement, which is likely when health problems have started to emerge and you will need this money the most.

Of course, you will not be able to predict exactly how much you will spend each year in retirement. Even if you create a complete and detailed plan, unforeseen expenses will inevitably occur. However, planning as much as possible will help you avoid major financial setbacks in retirement.

How to create a detailed retirement budget

When planning your retirement expenses, many of your future costs will be similar to your current costs. You will still have to pay rent or mortgage, for example buying groceries and having a means of transportation. However, you will have to consider other important costs when budgeting for retirement.

Your health expenses, for example, will likely change after you retire. Once you turn 65, you will be able to sign up for Medicare. This means that if you retire before this age, you will need to purchase insurance if you are not covered by your former employer. You could end up spending a lot more than when you were employed, which can quickly affect your budget.

In addition, health insurance is not free even if you are covered by Medicare. You will still have to pay all premiums, deductibles, copays and co-insurance. With Original Medicare (or Parts A and B), you could also be responsible for other expenses, such as prescription drugs and common dental and eye care. care. Before you retire, make sure you know what you can usually spend on health care and include these expenses in your retirement budget.

Taxes are another important cost to consider. If you store your money in a 401 (traditional) or traditional IRA, you will have to pay taxes on your retirement withdrawals. Depending on the tax bracket to which you belong, you may need thousands of dollars a year in taxes. And if you do not budget for these costs in your retirement plan, you risk spending more than you should every year.

You may also have to pay taxes on your social security benefits, depending on the amount of your income. To determine if you will pay taxes on your benefits, calculate your "combined income", which is half of the amount of your annual benefits and all other retirement income for the year. If your combined annual income is $ 25,000 or more (or $ 34,000 a year for married couples filing jointly), you may have to pay taxes on at least a portion of your social security benefits.

Considering all of these retirement costs as well as living expenses, you can establish a comprehensive retirement budget to estimate your future expenses. The more accurately you estimate these costs, the more you will be prepared for retirement – and the less financial surprises you will have.