Tips for Estimating Retirement Expenses: A Guide to Secure Your Future

Estimating retirement expenses can feel like an overwhelming task. However, if you want a secure retirement, you need to predict how much you are going to spend. Some might say that trying to predict your costs for every month for the next 15-30 years is preposterously impossible. However, it is probably no surprise to tell you that the closer you can get to predicting the future, the better off you will be.

Budgeting is useful when you are working, but it is completely necessary for retirement and retirement planning. When you have a job, you can kind of get by month to month making ends meet. However, accurately projecting your retirement expenses will determine how much you need for retirement and, if you overspend, you face a real risk of running out of money.

Getting your retirement budget right is hard. Even budgeting for next month is difficult. Predicting what you will spend for your entire future retirement can feel overwhelming.

So, how do you tackle the seemingly impossible job of estimating your retirement expenses? Here are 9 tips to make this monumental task more manageable:

1. Break it down into smaller pieces: 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. Budget for different phases of retirement: Another idea is to just budget for different phases of retirement. For many people, the first stage of retirement is not retirement at all — it is the transition to retirement. In this phase, you may work part-time or have a retirement job and your spending will likely stay as it has been. The second phase of retirement is when your focus is primarily on leisure. During this stage, your spending might increase as you suddenly have a lot of extra time and your time is spent spending money instead of earning it. As you get older, your health might decline and you may find that you want to slow down. Spending may really decrease during this phase. For many people, the last two years of life are the most expensive. Long-term care and medical costs spike for most people at the very end. The fact is that dying is very expensive. Some researchers suggest that if you need long-term care at the end of your life, your healthcare costs might be in the hundreds of thousands of dollars. Again, use the NewRetirement Planner to budget for these different phases of retirement. (The system actually estimates end of life expenses, so you just need to set levels for earlier phases.)

3. Focus on housing, transportation, and medical expenses: 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. Most retirement spending will fall into categories and be spent evenly each month — rising or falling over the years. Other retirement spending will be on big one-time costs. It is important to predict these expenditures. Will you be spending on:

– Home repairs or renovations
– Buying a new car
– Travel and vacations
– Healthcare expenses
– Hobbies and leisure activities

4. Consider debt and its impact: It is a big deal to pay off a debt, and it can have a tremendous impact on your retirement security. Make sure to account for any outstanding debts and plan to pay them off before retirement if possible.

5. Expect the unexpected: As much as you want to get your retirement expenses right, there are bound to be unforeseen costs. After all, as someone once said, the only thing you can predict is that something unpredictable will happen. Set aside some funds for emergencies or unexpected expenses that may arise during your retirement years.

6. Customize your budget categories: Some experts recommend that you create budgets with nearly 100 different categories. Others say that you can estimate expenses with just 5 buckets. Play around with different options and customize a list that works for you. Consider the following categories — you will notice that some things could be categorized in different ways:

– Housing (mortgage/rent, property taxes, insurance, maintenance)
– Transportation (car payments, gas, insurance, maintenance)
– Healthcare (insurance premiums, medications, doctor visits)
– Food and groceries
– Utilities (electricity, water, internet, phone)
– Entertainment and leisure activities
– Travel
– Hobbies
– Charitable donations
– Personal care (haircuts, grooming)
– Taxes

7. Use technology to your advantage: There are various retirement planning tools and calculators available online that can help you estimate your retirement expenses. Take advantage of these resources to get a better understanding of what you might need.

8. Review and adjust regularly: Your retirement expenses will change over time. Review your budget regularly and make adjustments as necessary. As you get closer to retirement, you will have a clearer picture of your actual expenses, and you can make more accurate estimations.

9. Seek professional guidance: If you are unsure about estimating your retirement expenses on your own, consider seeking the help of a financial advisor. They can provide valuable insights and guidance based on your specific circumstances and goals.

In conclusion, estimating retirement expenses may seem like a daunting task, but with careful planning and consideration, you can create a realistic budget that will help ensure a secure retirement. By breaking down your expenses into manageable increments, considering different phases of retirement, focusing on key categories, and accounting for unexpected costs, you can gain a better understanding of your financial needs during your retirement years. Remember to review and adjust your budget regularly and seek professional guidance if needed. With the right approach, you can confidently plan for a financially stable retirement.