Many people struggle with calculating their retirement needs. A simple approach—your M.U.G.—can provide clarity.

Imagine this: you’re stepping into retirement. No more early morning alarms. No more lengthy commutes. No more worrying about appropriate work attire. No more wondering if you had lunch or a bathroom break.

This newfound freedom is exhilarating, yet it might not offer the financial flexibility you expect. Research reveals that retirement may come with more financial constraints than anticipated.

On average, individuals nearing retirement view about two-thirds of their expenses as vital. While half think these essential costs will remain stable, roughly 14% predict an increase, and the rest expect a decrease.

To uncover the reality, start by defining your essential expenses. Enter M.U.G.: Mortgage, Utilities, Groceries. Survey results show housing costs topped the list of essential expenses, followed by groceries and utilities. Healthcare, transportation, and internet/cellphone costs were also significant. You might have additional non-negotiables like clothing, travel, or charity that you consider essential. The goal is to tally your essentials and determine if your income can consistently cover them.

  • Your M.U.G.: Begin with your mortgage (or housing), utilities, and groceries. Add any other expenses you refuse to cut. Review your bills from the past few months to get an accurate total. Inflation will likely increase these amounts, but it gives you a solid starting point. “Each individual’s M.U.G. varies,” notes an expert. “For some, it may include condo fees or car payments; for others, it might cover medications or gym memberships. In my case, supporting my family is essential. M.U.G. symbolizes the need to reflect on your core expenses and income requirements for retirement.”
  • Willingness to Compromise: After estimating your essentials, consider where you might cut back. Discuss this with your partner. Survey findings suggest people are more open to reducing food expenses, especially dining out, than cutting utilities or healthcare. Entertainment expenses were also seen as easier to trim compared to communication costs.
  • Identify Income Sources: With your non-negotiable budget in hand, ensure you have sufficient income—ideally for life—to cover it. Many individuals doubt they have enough, with only 29% feeling confident about meeting essential expenses throughout retirement. Social Security can help, but it typically covers just 40% of pre-retirement expenses. Remember, if you earned $50,000 before retiring, it replaces a larger portion than if you earned $100,000 or more. Check your recent statement at socialsecurity.gov for clarity on your benefits.
  • Explore Other Income Options: For additional essential or desired expenses, unless you have a traditional pension (which only 17% of Americans possess), your retirement savings are crucial. The challenge is effectively utilizing these funds. About 60% of surveyed individuals express concerns about withdrawing cash during retirement. This is why experts recommend converting part of your savings into a consistent income stream to cover essential expenses, while investing the rest for growth. Retirement can span decades, and with low interest rates, staying invested is often wise.
  • Use Your 401(k) as a Reference: Finally, the SECURE Act will soon display your retirement account savings as a lifetime income alongside a lump sum. Use this as a benchmark. If your projected income seems insufficient, consider it a prompt to boost your savings rate.