Planning for retirement is one time when a crystal ball would come
in handy. If only you could see ahead to know exactly how much you’d
need to live the good life in your retirement years. Unless you discover
a crystal ball or develop clairvoyance, you’ll have to make do with
educated guesses and advice from experts to plan a realistic retirement
budget. Take the things you know and the experiences of others to paint a
reasonable picture of how much money you’ll need in the years ahead.
Lifestyle Changes
Your lifestyle will probably change when you retire. You’ll spend
less on work-related expenses such as clothing, lunches out and
transportation, but you may spend more on travel and recreation. If you
plan to move after retirement, your housing costs will change.
Downsizing could mean lower housing costs, but moving to a resort area
could mean you spend more on housing. If you plan to pay off your house
before you retire, you won’t have to worry about a mortgage, but you’ll
still need money to pay real estate taxes and insurance. Thinking about
these kinds of lifestyle choices and looking at the amount you spend
today and estimating future expenses will help you begin to draw up your
retirement budget.
Medical Expenses
Even if you expect to be covered by Medicare when you retire,
you’ll need funds for prescription drugs and co-payments Medicare
doesn’t cover. Plus, the cost of Medicare comes out of your Social
Security checks and rises with inflation. As people age, medical costs
rise. The United States Department of Labor estimates that in
retirement, medical costs will rise about 7 percent a year and that
you’ll spend 20 percent of your budget on medical expenses.
Inflation
Costs rise with inflation. While it’s impossible to predict future
inflation rates, you can look to historical rates for clues. Between
1980 and 2002, the U.S. Department of Labor reports that inflation
varied from a high of 13.5 percent to a low of 1.6 percent. The
Department of Labor suggests using 3.5 percent when estimating your
future retirement expenses, which represents the average rate of
inflation for the last 20 years.
Percentages
One oft-quoted rule of thumb is that in retirement, your expenses
will be about 70 percent of what you spent during your working years.
With the average retirement stretching to 30 years, people remaining
healthier and active longer, and with rising health care costs, the
Department of Labor suggests you aim for a budget of 80 to 90 percent of
what you currently spend.
Income
Expenses are only half of your retirement budget. You need to know
if you’ll have enough income to meet those expenses. The Social
Security Administration will give you an estimate of what you can expect
to receive in benefits, depending on when you begin to collect your
checks. Add this amount to any pension benefits you’ll receive. If you
have other retirement savings, such as a 401(k) or IRA, determine how
much you’ll withdraw from these funds each year. Vanguard suggests
aiming for a 3 to 5 percent withdrawal rate in order to make the funds
last your full retirement. You can increase these percentages as you age
if you need more money.
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