Determining the amount of assets and income needed to fund a comfortable retirement is a significant concern for many people, and it’s shrouded in mystery for some. How much money will I need? How long will I live? What’s the best way to safeguard my resources?
Some expenses you have while working will decrease when you retire, but others could increase. You may want to continue some things you pay for now but can cut out if necessary. Consider this list of a broad range of expenditures:
- Utilities like electricity, gas, cable, and internet
- Home upkeep
- Rent or mortgage payment
- Debt payments on loans or credit cards
- Lifestyle expenses like travel, gym membership, or art classes
- Medical care
- Costs of retirement home living
- Education expenses for dependents
- Insurance including health, dental, vision, and life
- Charitable contributions
What Costs Will Be Higher or Lower?
If you have a mortgage that continues into retirement or rent your primary residence, that will likely be one of the highest costs. But many people pay their mortgage off by retirement, which can substantially reduce the cost of their housing.
According to AARP and Forbes, many retirees may find health care among the highest expenses, especially if they retire before reaching age 65 and gaining access to Medicare. AARP reports that the elderly spend 12.2 percent of their income on medical care, compared with seven percent for the overall population. According to Fidelity Investments, a couple retiring this year could spend $280,000 on medical care over the course of their retirement. That’s a lot more than most people have socked away in their 401(k).
Early Retirees may Face Hardship
While many Americans are pushing retirement plans back due to financial considerations, some retire early. In cases where the retiree isn’t eligible for Medicare, retirement may bring a search for affordable insurance. Unfortunately, the combination of reduced income and increased medical costs can quickly deplete retirement savings.
Plan Ahead for Expenses
Having lower fixed expenses in retirement is an excellent way to allow some flexibility to meet the unexpected. If you can pay off the mortgage, that's often a great approach. If that's not possible, consider downsizing to less space, that probably comes with a smaller payment.
In retirement, a couple may find that they can eliminate one of two cars they needed during their working years (or both, in some cases.) Cars are expensive to own and operate. Costs include insurance, maintenance, and gasoline, which seems to increase on a high-velocity basis.
Understand Your Available Income
Most retirees will have an income from Social Security, but this typically replaces a small portion of pre-retirement income. In addition, traditional defined-benefit pension plans are less common with each year, being replaced by defined contribution plans like 401(k) and others. Expenditures above these amounts will need to come from withdrawals from retirement or other assets. If necessary, adjust some of your planned expenses to ensure that you aren’t using your assets faster than you want to.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.