Estimating Retirement Expenses

1. Think in Yearly or Even 5 Year Increments

When you think of a budget, you probably think about a monthly budget. However, documenting monthly expenses for 360 months (the number of months in a 30-year retirement) seems daunting. The trick to any hard task is to break it down into smaller pieces. For your retirement budget, try thinking in 1-, 3-, or 5-year increments. What will you be doing for the first 5 years of retirement and what will that cost? What will be different in the next 5? And so on…

2. Tackle the Big 3 Retirement Budget Categories Separately from Everything Else

Housing, transportation, and medical are the big 3 retirement budget items. If you are anywhere near average, most of your money is spent on these categories. Housing represents 33.9%, transportation 16% of spending, and medical 13.4%. With housing and transportation expenses, it might be beneficial to budget them on a yearly basis.

3. Predict Big One-Time Retirement Expenses

Most retirement spending will fall into categories and be spent evenly each month — rising or falling over the years. Other retirement expenses will be on big one time costs. It is important to predict these expenditures, like some of the following:

• Education for children or grandchildren
• Travel
• A second home, a boat, RV or other recreational pursuit
• Contributing to help fund care for aging parents

4. Know When Your Mortgage Will be Paid Off – and Consider Retirement Housing Options

It is a big deal to pay off a debt and it can have a tremendous impact on your retirement security. Paying off your mortgage, in particular, is a big financial milestone that should positively impact your cash flow. You may also want to consider how your home might help fund retirement. Downsizing is a popular choice for retirees. Getting a reverse mortgage or moving to a retirement home are other common scenarios that will have a profound impact on your retirement expenses.

5. Budget for the Unexpected

As much as you want to get your retirement expenses right, there are bound to be unforeseen costs. One way to deal with this is to set aside 3–6 months’ worth of living expenses into an emergency fund.

6. Think About Needs vs Wants

When budgeting, it can be useful to break out your spending into needs and wants.

• Your needs are things that you must spend money on to get by: groceries, utilities, transportation, health care, and housing.
• Your wants are things that are nice-to-haves — but not necessary to survival — travel, hobbies, entertainment, etc…

7. However You Do it, Create a Retirement Plan

You have a lot of options for how to tackle one of the most important aspects of retirement planning — predicting retirement expenses. It doesn’t matter too much which option you choose. What matters is that you create a plan that is detailed and personalized.

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Article derived from 9 Tips for Estimating Retirement Expenses by Boldin