10 Expenses to Include in Your Retirement Budget
Retirement planning can be a bit complex. There are multiple factors to weigh in, right from healthcare and inflation to estate planning, business succession planning, tax planning, and more. Given the complexity and magnitude of things necessary for a comfortable retirement, starting planning from a young age is also essential. However, the main drawback to this can be the lack of foresight regarding what and how to plan. At the age of 30, your daily expenses can significantly differ from what you would need in retirement. For instance, in your 30s, you may have debt obligations like loans and mortgages. If you are a parent, you may be saving for a child’s future needs. Additionally, you would also be spending money on your daily needs, such as food, gas, rent, electricity, and other similar expenses. These expenses may form a large part of your budget today but may not likely figure in the future. For instance, if you buy a house at the age of 30, by 65, you may have cleared your mortgage. You also may not be saving for a child in your 60s and 70s, or contributing to retirement plans. Moreover, you may have other kinds of expenses, such as long-term care, that you would not have now.
Being able to predict how your lifestyle is going to be in the future is hard. The world is evolving at a fast pace, and newer inventions and ways of life are taking over sooner than you can expect. Smart homes are slowly becoming the new normal, and electric cars may remove the need for gas altogether. Therefore, it is crucial to understand what the future may hold and how you can plan for the cost of living in retirement. Reach out to a professional financial advisor who can help you plan for future retirement expenses to ensure you live comfortably in your golden years of life.
Here are some of the biggest expenses in retirement that you are likely to have. Make sure you account for them in your plan to enjoy a comfortable and financially secure retirement.
Ten retirement expenses to keep in mind:
Evidently, the first expense to be worried about is healthcare. Retirement is often used synonymously with old age. The older you get, the more health concerns you are bound to have. This is why healthcare remains one of the most significant expenses you can have in retirement. As per a recent report, A 65-year-old couple retiring in 2022 can spend anywhere close to $315,000 on healthcare in their retirement. In 2021, the estimate was lower by 5%. So, this figure is likely to rise in the future. One of the most worrying issues that you can face in retirement is not having enough money for medical expenses. Most people underestimate their medical expenses in retirement. One reason for this is their dependence on Medicare and health insurance. However, the truth is that there are several expenses that may not be covered under Medicare. Some prescription drugs, as well as devices, may not be covered under health plans, and you may have to pay for them out of your pocket. Additionally, you would also have to account for health insurance premiums. Further, there has been a rise in mental health issues too. These can be common in retirement. The transition to a slower pace of life, losing loved ones and friends due to old age, as well as being further away from your children can lead to mental health issues. These may or may be covered under health insurance. Therefore, it is vital to keep all of these factors in mind and save enough for any healthcare-related expenses in the future. Make sure to pick the right health plans that can cover all your needs. If your health plans or Medicare does not cover a particular expense, save separately for it.
If you have not yet paid off your loan or mortgage, you may have to spend a major chunk of your retirement corpus towards clearing debt. Therefore, the first thing to do is to ensure you carry no retirement debt. You may consider postponing your retirement or working part-time for a few years until your debt has been cleared. Even if your loans have been settled, housing costs can still add up to a lot. For instance, if you live in a big house, you would have to spend on its maintenance, repairs from time to time, renovation or retouching periodically, etc. You may even need to hire help to keep the place clean. This can increase the cost of retirement.
On the other hand, a smaller house can be easier to maintain and is also cost-effective in the long run. You will spend less on electricity, water, house help, etc. Make sure to plan well for your retirement home. Pick an affordable city. Some states have higher taxes than others. You may pick one where you have minimal tax liabilities and the standard of living is low. Also, consider downsizing if possible to save money.
When you create a budget for retirement, make sure to add travel to the list of expenses. Retirees like to travel in retirement as they have more time to explore the world. The absence of a job or children to take care of can be lonely. This is why a lot of retirees join travel clubs and groups. While traveling can be great for your mental and physical health, it can be expensive. Domestic and international travel can interfere with your other expenses, such as healthcare, housing, etc. Therefore, be very careful when you spend on travel related expenses. One of the most significant issues that most people face is the lack of proper planning. Travel is often a spur-of-the-moment event and not something that you make a plan over the long term. As a result, when the time comes to spend your money, the costs become hard to accommodate in your budget. Therefore, when planning for the biggest expenses in retirement, add travel to it and start saving for it from a young age. You may also use air miles and senior citizen discounts to get good deals on flight tickets and hotels.
Low taxes in retirement are one of the most common misconceptions. A lot of people think their taxes are high when they are working and minimal in retirement. However, there is no hard and fast rule to this. Your tax liability in retirement will depend on your choice of investments and the amount of your savings. For instance, if you use tax-deferred options like the traditional 401k or the traditional Individual Retirement Account (IRA), you would push your tax liabilities to retirement. In this case, you may have to pay higher taxes in retirement than before. The Required Minimum Distributions (RMDs) will start from the age of 72, and you would have to pay tax on each distribution. Remember to keep this in mind and plan for your future accordingly. Do not assume that the entire corpus will be yours to use. You would owe considerable tax on your savings and investments.
Food is a necessity and an essential expense that cannot be eliminated entirely. However, it can be reduced. A lot of people end up spending a major portion of their income on food by dining out or ordering food at home. The costs may seem negligible but can add up to a lot when combined at the end of each month. Retirement is a time when you will likely go out more and catch up with friends and family. But be mindful of the costs and try to cook at home as much as you can. Also, pick affordable places and look for discounts or deals when going out. A lot of places offer senior citizen discounts, too.
6. Children and grandchildren:
If your children are still dependent on you, you may have their expenses to think about. If they are living at home, you would have to cover their daily needs like food, electricity, water, etc. You may even have to cover their travel or commuting expenses to their school or college. In most cases, retirees do not have to worry about their children’s expenses as they would likely be independent by then. However, if you have children at a later stage in life, you might experience this. Irrespective of the situation, it is always advised to encourage your children to be financially independent. Students can also take up part-time jobs to fend for themselves or contribute to the house.
Additionally, you may also have to look after your grandchildren. Being a grandparent is a special feeling, and you may like to shower presents on your grandchildren from time to time. This can add to your financial burdens. While it is common to lose track, try to be prudent when dealing with money. Avoid splurging on them. Give gifts only on special occasions. Also, remember to set the right precedent for your grandchildren. You can teach them a lot about financial discipline through your gestures.
7. Socializing and entertainment:
In the absence of a job, you will have a lot of time for yourself. You might like to spend this doing the things you enjoy. You may want to join a club where you can socialize, play golf, and enjoy facilities like spas and saunas. You may also join groups or hobby classes, such as yoga, painting, pottery, and others. These expenses can be recurrent in nature and can form a part of your monthly budget. So, make sure to save money for them beforehand. Socializing can be very important for your mental and physical health. So, having adequate funds will ensure that you get to enjoy these simple joys.
8. Financial emergencies:
A typical retirement budget covers essential expenses like food, rent, etc. However, it may overlook unexpected expenses like a financial emergency. Financial emergencies can come in different shapes and forms. You may have to repair a house after a natural disaster like a flood or a hurricane. Your child may be in trouble and can require funds. Theft can also cause unexpected financial trauma. All of these unprecedented situations can be controlled with adequate funds by your side. Instead of upsetting your planned cost of living in retirement, you can simply use your emergency fund to cover these events.
9. Long-term care:
During the last phase of retirement, you may have to opt for assisted living due to poor health. As you grow old, it can be hard to live by yourself. Long-term care costs can be high, ranging from approximately $50,000 annually for assisted living to over $100,000 annually for a private room at a nursing home facility. These costs are likely to increase with time due to factors like inflation. Therefore, it is crucial to account for them. Long-term care can be some of the biggest expenses in retirement. You can buy a long-term care insurance plan or talk to your children and consider the possibility of moving in with them. You can also use your personal savings to pay for some things like homemaker services or home health aides.
10. Losing a spouse:
Losing a spouse can hurt you in many ways. The emotional trauma is unparalleled. The financial repercussions can be further damaging. Therefore, it is essential to prepare for such an eventuality. You can do so by buying life insurance. Life insurance can help grieving spouses carry on with their life. You may also opt for survivor benefits for pension plans. This can ensure a regular flow of income for the surviving spouse.
Additionally, you may consider delaying your Social Security benefits till the age of 70 to receive a bigger check. Typically, spouses can withdraw benefits from the age of 60, and 50 in the case of disabled individuals. However, delaying claiming Social Security benefits can help them draw a bigger check and cover more expenses.
Creating a budget for retirement can take years and years of planning. It may not always be easy with the rising costs of goods and services. However, evaluating your goals can help. It may also be advised to be cautious of your spending habits. Your lifestyle after retirement dramatically differs from pre-retirement, and so does your income. With limited sources of income in your golden years, it is crucial not to overspend and lose sight of the future. Outliving your retirement fund can be particularly hard as it would force you to be dependent on your children.
So, plan well and consider hiring a financial advisor for professional advice if you need any help through this process. Use WiserAdvisor’s free advisor match service to find highly qualified and vetted wealth advisors who can guide you on the same. Answer a few questions about yourself and get matched with 1-3 wealth advisors that are suited to meet your financial requirements.
For further information on how you can create an effective retirement plan for your unique financial needs, visit Dash Investments or email me directly at email@example.com.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.