Key Takeaways:
- To prepare for retirement on a budget, focus on what you can control: spending, consistent saving, and benefit timing.
- Utilizing employer benefits, reducing high-interest debt, and planning for healthcare costs can be extremely valuable long-term, even with small contributions.
- Location and state taxes can affect your take-home amount during retirement, so it helps to learn which states do and don’t tax retirement income as you plan.
Retirement planning doesn’t require a huge salary, but it does require taking a realistic look at what you spend, what you can save, and how to ensure a steady monthly paycheck once employment income stops. Even if money feels tight, you can still save for retirement. Small contributions are better than none.
Consistent saving can help build a solid foundation to sustain you after you leave the workforce, making it easier to cover unexpected emergencies, healthcare premiums, and other needs. In this guide, you’ll learn which steps you can take, even on a budget, to build a retirement plan that will help secure your future and what American Hartford Gold has to offer.
1. Create a Realistic Budget Plan
If you don’t track your spending, it’ll be difficult to save ahead of retirement. Even small charges add up over time, so it’s important to be mindful. You don’t need to cut out everything you enjoy, but you do need to identify the non-negotiable expenses. This will help you develop a clear retirement budget so you can reach your savings target before leaving work.
Take your current monthly expenses and separate them into two lists, an essentials list and a discretionary list.
Essentials may include:
- Housing
- Utilities
- Groceries
- Transportation
- Health insurance
- Debt payments
Discretionary spending might include eating out, subscriptions, entertainment, and travel.
Set Your Retirement Baseline
Create a retirement baseline by updating your current essentials to reflect how your life will change after retirement. For example, you may drive less when you’re no longer commuting to work, but you may spend more money on hobbies. You should also assume healthcare costs will increase over time, since they tend to rise as we age.
If you plan to travel more after retiring, include that in the budget as well. Then compare your baseline to the income sources you expect, such as Social Security or 401(k) withdrawals. The difference between the baseline and those sources will tell you how much to save. Even saving $50 or $100 each month is progress.
2. Grow Your Emergency Fund and Reduce Debt
When money is tight, unexpected expenses can put your savings at risk. A car repair or medical bill could force you to apply for or max out existing credit cards, which would impact both your credit and future cash flow. This is why it’s important to have an emergency fund, even if you can only set aside $100 each month.
Debt can affect progress as well. If your credit card balances are high, it may be difficult to save. In this instance, the best approach is to find a balance. You can still build an emergency fund while paying down debt, even if you can only add $10 monthly. Then, as your debt shrinks, you can redirect those payments towards your savings and retirement accounts.
3. Utilize Benefits and Employer Matching
If you have a workplace retirement plan, use it to your advantage. Payroll deductions automate saving before you have a chance to spend it. Employer matching, when offered, can also help you make progress towards your goals.
Workplace plans may include a 401(k), 403(b), or 457(b), depending on employment type. If your employer offers to match the first 3% of your pay, aim to contribute at least enough to earn that match. If you can’t, start at a lower amount and increase it over time.
4. Use IRAs to Supplement Your Plan
If you don’t have a workplace plan, or you do and want to save more, an IRA may be worth considering. Traditional and Roth IRAs offer tax advantages and flexibility. You can set up automatic bank drafts that function similarly to payroll deductions. IRAs also help if you switch jobs often and want an account that isn’t attached to an employer.
There are contribution limits, but you don’t need to contribute the maximum to benefit from your IRA. You can start at $50 per month, then increase over time. If you’re married and one spouse doesn’t work, a spousal IRA may allow contributions based on the working spouse’s earned income.
5. Plan for Healthcare Premium Costs
Healthcare is one of the primary reasons retirees feel financial pressure after leaving the workplace, especially since health costs tend to increase with age. Medicare begins at age 65 for most people, but premiums and out-of-pocket costs can still be burdensome. Prescription coverage, supplemental policies, and dental and vision needs can also add to the monthly total.
If you retire before 65, you may need bridge coverage, which can also be expensive. Prepare for these costs in advance to avoid becoming overwhelmed when you no longer have employment income. Start by taking a look at your current health premiums, prescriptions, and typical out-of-pocket costs, then estimate how they might shift at 65.
Medicare Part B charges a premium, and drug plans vary based on individual health needs and location. Some retirees opt for a Medicare Advantage plan, while others choose Original Medicare with a supplemental policy. Do the research you need to understand these plans so you know which health path you want to take after leaving work.
6. Lower Your Taxes
When you’re saving on a budget, taxes matter. State income taxes can reduce your net retirement paycheck, especially if part of your income comes from traditional accounts. Some states don’t have income tax. Others have income tax, but retirement income is exempted. If you’re considering relocation, proper research can help your retirement money go further.
There are nine states that don’t tax retirement income:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
There are four states that have income tax but exempt common types of retirement income:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
In these 13 states, a retiree’s Social Security, pensions, and withdrawals from IRAs or 401(k)s are usually treated favorably at the state level.
Tax Types You Can’t Avoid
No-income-tax states often raise revenue through other sources, such as sales and property taxes. If you own a home, property taxes may matter more to you than income tax savings. If you rent, sales taxes may have a larger day-to-day impact. In New Hampshire, there is no income tax or sales tax, but property taxes can be high in comparison to other states.
Washington has no income tax, but it does tax certain levels of capital gains, which matters primarily for large taxable investment sales, not IRA or 401(k) withdrawals. The four income-tax states that exempt retirement income can still tax wages and other nonretirement income. So if you plan to work part-time during retirement or operate a small business, keep this in mind.
Iowa and Pennsylvania normally tie exclusions to retirement age and distribution rules, so timing is important. Mississippi typically excludes qualified retirement distributions, but early distributions may be treated differently. Illinois exempts many retirement income sources from tax, but be sure to research local regulations because laws are subject to change at any time.
7. Automate and Protect Your Progress
Automation is a useful tool when planning for retirement on a budget. Automatic payroll deductions, automatic IRA drafts, and automatic savings transfers turn stressful planning into a simple routine. You can also automate bill pay so you don’t get charged any late fees. Protecting progress also means being proactive to prevent data leaks and fraud.
Use strong passwords and multi-factor authentication for financial accounts. Consider freezing your credit so new accounts can’t be opened in your name without your approval. Review statements each month to confirm all transactions were yours. When saving on a budget, protection is just as important as growth.
Include Precious Metals in Your Retirement Plan
Preparing for retirement on a budget means being consistent. Build a realistic budget, include any guaranteed income sources, reduce expensive debt, and automate savings so you aren’t tempted to overspend. Consider how state taxes can affect your take-home retirement income, especially if you want to relocate after leaving the workforce.
If you’re interested in adding more value to your retirement portfolio, consider physical gold. American Hartford Gold offers clients a Gold IRA, which helps protect the value of your savings. Diversify your assets today for a better tomorrow.
FAQs
How do I save for retirement if I can only afford a small amount each month?
Start with an amount you can maintain, even if it’s $25 or $50. Automate it through payroll or an IRA draft so you don’t have a chance to spend it. Increase it by small amounts as debt decreases or income increases. Saving consistently is more important than saving a large amount each time.
What should I prioritize first: debt payoff or retirement savings?
Balance both. Build a starter emergency fund, one month of expenses, for example, so you have cash available if you need it. Then, focus extra funds on debt while contributing enough to your retirement account to take advantage of your employer match (if applicable). Once expensive debt is reduced, redirect those payments into your savings and retirement accounts.
Which states don’t tax retirement income?
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t tax retirement income. Illinois, Iowa, Mississippi, and Pennsylvania exempt retirement income, but they do have a standard income tax. Note that eligibility for exemption can vary depending on timing and distribution type.
Sources:
How much money should I save each year for retirement? | Fidelity
IRC 403(b) tax-sheltered annuity plans | Internal Revenue Service | IRS
IRC 457(b) deferred compensation plans | Internal Revenue Service | IRS
Compare Original Medicare & Medicare Advantage | Medicare
What Original Medicare covers | Medicare
Topic no. 409, Capital gains and losses | IRS
