How much will you need to live a comfortable retirement? It's a question that can't be answered without giving serious thought to how you really want to spend your retirement.
Retirement is no longer viewed as a time to slow down, but is now considered a new beginning in life. Thus, your current living expenses may have little to do with your retirement expenses. However, keep in mind that retirement often proceeds in stages, with different spending trends in each stage. The three basic phases are:
- An active phase, when the retiree is in good health and actively pursuing travel and hobbies. This is typically the most expensive retirement phase.
- A passive phase, when the retiree's energy starts to wane. Life starts to slow down, and living expenses typically decrease.
- A final phase, when medical conditions often result in subsistence living. This is typically a more expensive time than the passive phase due to increased medical expenses, but as long as proper medical arrangements have been made, probably not as expensive as the active phase.
To help you visualize your retirement so you can estimate retirement expenses, consider these questions:
- When do you want to retire? Will you realistically have the resources to retire at that age?
- Do you plan to stay in your current home, trade down to a smaller one, or move to a different city? If you plan to move, is the cost of living more or less expensive than your present city? Have you made extended trips to the new location during different seasons to make sure you'll enjoy living there?
- Will your mortgage be paid off by retirement? What about other debts?
- Will you continue to work after retirement? If so, will you work part-time or full-time? Where will you work and how much can you expect to earn? Do you have any hobbies or interests that can be turned into paying jobs? Are you planning to start a business after retirement?
- How will you spend your free time? What hobbies will you pursue? How often and where will you travel? How much will all these activities cost?
- How will you pay for medical costs? Will your employer provide health insurance, or will you need to purchase insurance to supplement Medicare coverage?
- Do you have any medical conditions that are likely to impact your quality of life in retirement? What would you do if you became physically disabled? Would your spouse take care of you, would you move in with your children, or would you go to a nursing home? How will you provide for long-term-care costs?
- How much of your income will be provided by personal investments, including 401(k) investments? Are you confident you can invest so those investments will last your entire retirement? How much of an investment loss could you tolerate without changing your retirement lifestyle?
- What would happen financially if your spouse dies? If you die, would your spouse be able to support himself/herself financially?
Answering these questions should give you a clearer picture of what your retirement will be like.