Make Sure You’re Saving Enough to Support Your Desired Lifestyle
Accurately Estimating Retirement Expenses
Just how much are your golden years likely to cost? Sure, it’s relatively easy to go online and find retirement savings calculators that attempt to estimate your retirement needs. For instance, some models project that most retirees will need 60% to 70% of their current income upon retirement. While these generic guidelines certainly work fine as a starting point, most Americans could definitely benefit from additional sound financial advice as they try to make sure they will have enough assets to see them through retirement. Underestimating yearly expenses by even a few percentage points can have quite a significant impact over a 20- or 30-year retirement time frame.
Start from Scratch
Coming up with a reasonably accurate expense forecast typically requires projecting each expense separately, taking into account fiscal changes during retirement. Keep in mind that some current expenses should decrease. For example, you probably won’t be spending as much on current job-related costs such as commuting and business attire. Additionally, should you be able to pay off your mortgage in full before retirement, you will not have that expense going forward. Once you’re fully retired, you will no longer need to save money for retirement (though you may still need to save some money each year). Some retirees may also be able to reduce the amount of life insurance coverage they have. After all, they will no longer need it to replace the income they had earned while they were employed. Child-rearing expenses also tend to decrease. Most parents hope that, by the time they retire, their children will be out of the house and supporting themselves.
Expenses are Likely to Rise
While it’s tempting to assume that most expenses will decrease in retirement, that’s not always the case. A few of them are more likely to increase and in some cases significantly. One of the most important expenses you should consider is health care. According to Fidelity Benefits Consulting, a couple that retires at age 65 can expect to spend an estimated $220,000 on health care costs during retirement. Of importance to note, this is after accounting for expenses which will be covered by Medicare. The estimate assumes that the husband will live to age 82 and the wife to age 85, which means their costs will average $11,000 annually.
Moreover, some housing-related expenses are likely to increase:
- Property taxes tend to head in only one direction . . . and it isn’t down. Even modest annual increases in taxes can be significant over time. A tax bill of $1,000 will increase to nearly $1,500 over 20 years with an annual increase of just 2%, and in many parts of the country the taxes may be higher than those noted in the example above.
- You may need to hire others to perform chores that might become more difficult to handle yourself as you age, such as shoveling snow or mowing the lawn, or even cooking and cleaning.
- You may also find it necessary to modify your home in order to make it easier to navigate or even just to maintain during your retirement.
- Even if you downsize, you may need to do some renovations in your new home or condominium. You may also need to pay association fees which you were not incurring previously.
Also keep in mind, even though you’re no longer working, you may still have to pay income taxes. Some IRA withdrawals and social security benefits can be taxable, and of course your income from assets held in nonretirement accounts is also generally taxable. In addition, you may lose some tax deductions you currently are able to take advantage of. For example, if you pay off your mortgage before retirement (which typically is recommended), you will no longer have mortgage interest to deduct on your tax returns.
Finally, although having more time to travel and become involved in other hobbies and pastimes is a true benefit of retirement, these activities almost always require some money. So, make sure that you include an allocation for this in your budget.
Projecting (and Protecting) Your Future
Carefully projecting your retirement expenses offers several benefits. Most important, it can help you determine how much you need to save now in order to ensure a comfortable retirement. The exercise can also assist you in thinking through just how you would like to be able to spend your time, once you’re no longer in the job market full time.
Your financial advisor can also help you to develop reasonable projections of all of your expenses in retirement. They can also help you determine the amount that you will need to save currently for your retirement, and advise on ways to help you achieve these goals.
Sidebar: Don’t Let “Unexpected” Expenses Drain Your Coffer
When it comes to expenses that are unpredictable — such as the inevitable car and appliance repairs — it makes sense to budget an annual allowance. To start the process, total up the money you’ve spent on such repairs and other “unexpected” expenses over the past few years to arrive at an average amount per year. Then, depending on your situation, you may want to increase the number over time, given that repairs tend to become more frequent as products age. Also, be aware of the potential for more significant expenditures. For instance, if you would want to assist an adult child who needs financial support due to a divorce or job loss, make sure you factor this in your financial planning.
Most critical, be sure to consider the “bite” that inflation can take on your budget. A monthly food budget of $400 increases to nearly $600 in 10 years, given a 4% annual inflation rate.
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