As people prepare to retire, a common mistake is the belief that their living expenses will be greatly reduced, sometimes even cut in half. While it is true that some expenses will be minimized, other expenses will increase, resulting in expenses simply being shifted rather than eliminated.
Underestimating how much you will need to save to sustain the lifestyle you want to live can create added stress during your golden years. Before you decide how much you need during retirement consider the following underestimated expenses:
While many people plan on paying off their mortgage prior to retiring, yard maintenance, utility bills and big ticket repair items such as a new furnace may still exist and can eat away at your budget. Clients often tell us that their property taxes are higher than their original mortgage payment when they purchased their home! If you own or plan on buying a vacation home, housing costs can be doubled. It’s also important to consider that as you age, tasks that you once easily performed yourself, such as mowing your lawn, cleaning your house or fixing minor repairs might have to be hired out if the physical strain becomes too much.
How to Prepare: If you feel strained by your housing costs, think about whether you should downsize or even rent a home or vacation home instead of buying. While some people don’t like the idea of paying rent, a long-term rental can make it easier to budget as you won’t be responsible for any surprise repairs or expenses. If you do own a vacation home, consider if potential rental income can supplement the costs.
2. Medical Expenses
Medical expenses can be the hardest expense to predict, quickly accelerating if you end up requiring long term care. Even if you qualify for Medicare, not all medical expenses will be covered, requiring you to have to pay out of pocket.
How to Prepare: Make sure you are enrolled in the right Medicare plan for you.
Once the paycheck stops people often assume their tax burden will decrease. However, you will still have to pay taxes on withdrawals from your 401(k), IRA, and potentially social security, depending on your total income. Also, you will likely have fewer deductions than when you were working, contributing to a retirement plan and paying a mortgage.
How to Prepare: Meet with a financial advisor and CPA who can work together to make sure you have a strategy in place to minimize your tax burden as you transition into retirement.
4. Transportation and Travel
Although your work commute won’t exist, you’ll still have to pay for gas, car maintenance and insurance. With ample free time, travel expenses can increase for retirees who want to check off bucket-list trips and spend more time with friends and family who live out of town.
How to Prepare: Set a travel budget and stick to it. Rather than staying at five star hotels, look into more moderately priced places to stay and consider traveling in the off-season. If both you and your spouse are retired, ask yourself if you still need two cars, which will reduce insurance and car maintenance costs.
5. Gifting to Adult Children
As we’ve written previously, it can be very tempting to help adult children (or grandchildren) with education costs, wedding celebrations or even money for a down payment on a home.
How to Prepare: Before deciding on whether to give and how much, make sure you understand the impact a gift or loan could have on your ability to retire when and how you want. At Legacy, we have the technology to model how a gift or loan will affect your ability to sustain yourself in retirement.
Maybe you plan on increasing the amount of times you play golf each month, attending more concerts and museum exhibits in your city or taking lessons to learn a new skill. Increasing the amount of extracurricular activities can quickly add up.
How to Prepare: You want to make sure you can lead a fulfilling retirement on your terms, so make sure to include hobby and entertainment expenses when determining how much you’ll need in retirement.
7. Impact of Inflation
When we meet with clients we model out how much money they’ll need during retirement based on their current expenses and inflation. We find that inflation is often ignored or underestimated by retirees who may insist there is no possible way they would spend the amount we project. However, consider that it took $121,523.81 in 2015 to buy what $100,000 could buy in 2005. This is true even though inflation has been lower than normal over the past 10 years.
How to Prepare: Don’t bury your head in the sand, but make sure you’re taking into account inflation before you retire.
How much you’ll need in retirement will depend on multiple factors and can be difficult to navigate.
Consider speaking with an advisor who can help you plan for retirement. At Legacy, our goal is for our clients to live a fulfilling retirement. We’d love to help you as you prepare.