Introduction

• It's never too early to start planning for life after employment by making a retirement budget. In fact, the most important principle that makes a retirement budget work is the power of compounding interest over time. A small initial investment in conservative investments can grow exponentially if given enough time. In general, once the financial need through an individual's life expectancy is determined, a retirement budget works by letting money saved over time do the work instead of the person. The budget combines funds from several different sources of income, usually grouped into government benefits, retirement accounts and other investments.
  
  

Determining Need

• Though individual life expectancy will vary by demographic group, individuals should plan to live at least to 85 years of age. Most people can maintain their pre-retirement standard of living on 60 to 80 percent of their former earnings. For those making more than $50K annually, a target of 60 percent is usually adequate, whereas those earning between $20K and $30K will likely need to continue taking in 80 percent of their work income in their retirement years.
  
  

Government Benefits

• While government employees, veterans and those on disability may receive additional income from the government, most workers will at least receive some social security benefits. Individuals have options as to when they can start to receive these benefits, but the total amount they receive will be reduced if they take them prior to reaching full retirement age.
  
  

Retirement Accounts

• The major attraction of retirement accounts like IRAs and 401(k)s is they defer taxes if maintained through an employer, and they often will grow through employer contributions over and above those deducted from wages or salary. A retirement budget should account for the fact that--unless the retirement was funded with after-tax money--income taxes become due upon withdrawal. Also, there are harsh penalties for early withdrawal.
  
  

Other Income

• In addition to retirement savings accounts, a retiree should draw from a diversified portfolio of investments. The most common include certificates of deposit, real estate income, and annuities, as well as stocks and bonds. Securities--such as CDs, bonds and annuities--will generate steady, dependable income over time, as will real estate and dividend-paying stocks. However, the latter optinos come with added risk. Another source of income some retirees contemplate is a part-time, low stress job that can pass the time and help fill any gaps in a retirement budget.