Certain expenses are bound to decrease when you retire, especially if you’ve successfully eliminated your debts like your car and mortgage. Your cost of living might also drop if you’ve downsized or aren’t driving as often or as far for work.
But while some things may be cheaper, there are still various retirement expenses to watch out for. Some of these costs are direct in nature, like healthcare, while others are more indirect, like rising inflation rates.
Because there are so many things to account for, it’s important to take a moment and map out the various expenses you expect to have once you retire. That way, you’ll be prepared whenever something comes up and won’t have to worry about how you’re going to pay for it.
While costs vary by person, some are common across the board. As you sit down to create (or adjust) your retirement budget, here are the top expenses to consider.
Medical expenses and long-term care are two major expenses that tend to be prevalent once you retire.
“It is important to remember in retirement [that you] will no longer be covered by your employer’s group policy, and you may retire before Medicare coverage begins at age 65,” said Kim Gattis, senior vice president at UMB Bank. “Beginning to save specifically for retirement healthcare now can provide a cushion and less worry later on.”
Even if you are eligible for Medicare, there are still expenses associated with it.
“It’s very important to plan for how you will cover healthcare expenses in retirement, and think beyond just copays and out-of-pocket expenses for medical care. Even if you retire once you are eligible for Medicare, there can be premiums due for Medicare coverage, depending upon your working history and income,” said Kristen Beckstead, CFP, ChFC, vice president at First Horizon Bank. “Also, you will likely want to purchase a Medicare supplement plan to continue the level of coverage to which you were accustomed during your working years.”
And remember, Medicare won’t cover everything. “Expect $4,300 per year for out-of-pocket costs, according to the AARP,” said Tammy Trenta, founder of Family Financial.
While it’s generally recommended that you pay off any outstanding debts before retiring, not everyone does.
“Account for any outstanding loans or mortgages,” said Eliza Arnold, founder of Arnie. If there’s a chance that you might owe money after retiring, you’ll need to consider any monthly payments and interest.
“Pay off as much debt as possible before retiring to reduce your monthly expenses,” suggested Trenta. This will give you more room in your budget for other expenses.
Upon retiring, you may be responsible for certain taxes that you weren’t before. That’s why it’s important to consider which taxes you might be faced with and how much they’ll cost.
“Social Security, pensions, and withdrawals from tax-deferred accounts are often taxable,” said Trenta.
Another major retirement cost is housing.
“If you don’t own your home when you reach retirement age, figure that rent will only go up to match or outpace inflation,” said Todd Stearn, founder of The Money Manual. “Even if you own your home, remember to budget for expensive repairs. Unfortunately, things break and need to be replaced.”
Trenta added, “Even if your mortgage is paid off, property taxes, maintenance, and utilities remain. [The] median cost for a senior household is about $16,723 per year, based on a report by the Employee Benefit Research Institute (EBRI).”
Food and other everyday expenses are still going to be there long after you retire. Even if you plan to dine out less often or eat at home more, you’ll still need a food budget.
“The average older adult spends around $3,000 annually on food, as per the BLS,” said Trenta. Consider how much you typically spend on food and add that to your monthly budget.
Although you won’t have to commute to work, there’s still a good chance that you’ll be going out once you retire. Depending on your goals and hobbies, you might even find yourself spending more money on transportation than you do now.
“The average senior spends around $6,814 a year on transportation, according to the Bureau of Labor Statistics (BLS),” said Trenta. This breaks down to roughly $568 a month.
Entertainment and Hobbies
Once you retire, you’ll have more time to pursue your interests and hobbies. You’ll also have the opportunity to explore new ones. But these may come at a cost, especially if one of your hobbies is traveling.
“Budget for leisure activities and travel plans,” suggested Arnold. Since costs can vary quite a bit, err on the side of caution and imagine you’re going to end up spending more than you actually will. That way, you’ll have more money than you expect when the time comes.
Another key factor to consider is inflation and its impact on your retirement income. According to Sebastian Jania, owner of Ontario Property Buyers, inflation “is probably the most important as a lot of people save for retirement based on the costs today instead of the inflationary adjusted cost in the future.”
One way to prepare for inflation, Jania said, is “to be very clear as to what [the rate is] today and how [it has] gone up historically over time. Further, by adjusting [your] numbers to the potential future costs, [you] can be in a lot more confident position when it comes to retirement.”
Emergencies come up when you least expect them, so it’s important to be prepared.
“It may seem surprising, but it’s also important for retirees to have a separate amount of saved money within their savings account to help protect the income you’ll live on during retirement,” said Gattis. An emergency fund can also “take the stress off your finances should your retirement account experience a down market. This type of savings will provide potentially critical support while the market recovers.”
There are many ways to create your retirement budget, but one of the best strategies is to track your expenses for a period of time.
“If you want to retire on schedule and with confidence, a ‘guesstimate’ of expenses won’t do,” said Beckstead. “You must know your exact lifestyle expense numbers because human nature tends to underestimate those numbers. If you underestimate what it costs to maintain your current lifestyle, then you will underestimate your retirement budget. This puts you at risk of having to drastically reduce your lifestyle during retirement.”
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