Budgeting for Your Golden Years

At the end of each year, many people take time to evaluate their retirement plans, work on their budgets and evaluate how they are doing financially.  In fact, this is something everyone should do once a year, whether they are young adults, middle aged or already retired. 

One of the keys to a happy, successful retirement is to have a realistic budget.  This involves knowing which expenses will be reduced or eliminated entirely, which expenses are expected to remain about the same, and which expenses are likely to increase.  It is important to be honest when you evaluate how much money you can reasonably expect to need in order to have a satisfying retirement.  Here is some basic information to get you started:

Retirement Expenses that Could be Reduced or Eliminated

Mortgage -- Will you pay off your mortgage or move someplace less expensive where your payments will be lower?  If you go into retirement with your current mortgage, of course, you can expect this expense to remain unchanged.

Rent -- If you do not own your own home, will you remain in your current lease or move to less expensive housing?  Renting does make it easier for people to be flexible in making adjustments to their cost-of-living.

Debt -- Even if you still have a mortgage, many people try to pay off all or most of their other debts before they retire.  If this is true for you, it could make a substantial reduction in your monthly budget, depending on how much debt you have been carrying.

Commuting and Transportation -- Most people drive fewer miles after they retire, which also means that they spend less on related expenses, such as car repairs and parking.  However, if you plan to do a lot of traveling by car, this may not be true for you.

Lunches, work clothing, dry cleaning and other job related expenses -- Once you stop working, you are much less likely to be eating lunch out every day, buying suits or taking them to be cleaned.  The amount of savings can add up.

Retirement savings -- After you begin living off your retirement savings, you will stop adding money to your IRA or 401(k).  This is one expense that will drop off completely.

Medical Expenses - Maybe -- If you are old enough to go on Medicare when you retire, and if you decide to use a high-quality Medicare Advantage plan, you may save money, especially if you paid your own health insurance premiums in the past.  However, if you have received free or inexpensive healthcare through your employer, then this could be an expense that will be higher when you retire.

Retirement Expenses That Will Remain About the Same

Groceries -- While we like to think we will save money in every area of our life, the truth is that certain expenses, such as our grocery bill, are going to stay the same or may even increase slightly as we eat more meals at home.

Utilities -- This is another bill that will probably remain about the same or might increase slightly, especially if you have been accustomed to turning the thermostat down when you're at work.  Once you are home all day, running the furnace or air conditioner, watching television or using the computer, your utility bills will be at least as much as you spent in the past and could go up slightly.

Insurance -- The amount that you spend on homeowner's or renter's insurance, life insurance, and auto insurance are all going to remain about the same as what you have paid in the past.

Property Taxes -- If you own a home, even if you have paid it off, you still need to include your property taxes in your retirement budget.  They will initially continue to be about what you have paid in the past.  Over the years, you can expect taxes, and everything else, to go up.


Retirement Expenses that Could Increase ... Possibly a Lot!

Health Insurance -- Whether or not your health insurance costs go up or down depends a lot on what you have been paying in the past and the type of Medicare supplement you decide to purchase after you retire.  For example, if your employer paid for your insurance prior to retirement, then anything you pay for Medicare and the supplemental policies you choose will be an increase.  If you had an expensive individual health insurance policy in the past and you had to pay the premiums yourself, then Medicare, even with a Medigap supplemental policy, will seem like a bargain.  You need to do your research and have a realistic budget for your health insurance.  For most people, the least expensive way to handle Medicare is by using a Medicare Advantage plan.

Other health expenses -- Depending on the insurance you choose, you will still have co-pays and deductibles with most Medicare plans.  Drug costs are sometimes high for senior citizens, as well.  Basic Medicare does not cover dental or vision expenses, which can be significant as you age, so you may need to purchase extra insurance to help with these costs.  Even if you do have insurance, certain dental expenses, such as implants, can still be quite high.  It is wise to estimate what your deductibles and other costs could be and set aside some money to cover these possible future expenses.

Long-term care -- If you decide to purchase long-term care insurance after you are already in your 60's or 70's, the insurance premiums could be quite high.  If you have not yet reached your 60's, you are better off getting the insurance while you are younger and before you have developed any serious health problems. It is smart for most people to get the insurance, because the cost of long-term care can be significant when paid out of pocket.  According to the the U.S. Department of Health and Human Services, you have a 70% chance of needing some type of long-term care after the age of 65.  A nursing home can cost as much as $90,000 a year and assisted living facilities run approximately $42,000 a year.  One way or another, it is wise to either buy the insurance or set aside some money for this possible expense.

Entertainment --  Particularly during the first decade after you retire, you may want to kick up your heels a little and spend more time traveling, eating out, going to plays, or indulging in your favorite hobbies ... whether that means enjoying more time on the golf course, purchasing a sailboat or spending money on your favorite collection.  It's important to budget for these activities before you retire.  It won't be any fun to retire if you are unable to afford to do any of the things you looking forward to.

Emergencies -- An unexpected event can have an even greater effect on you when you are not working, since it could be difficult to make up for the lost money.  For example, a sudden drop in the value of your investments, a period of high inflation, losing your home and possessions in a flood, earthquake or other catastrophe, significant medical expenses, or major car repairs can be difficult losses to overcome, particularly if you are living on a tight budget.  When you first retire, it is wise to set aside as much money as possible in an emergency fund so you are prepared for the worst.

The bottom line is that you need to prepare for everything.  As they say, hope for the best and prepare for the worst.  That's the secret to a comfortable retirement.

Source:

Yahoo! Finance, Dave Bernard, "5 Costs to Include in Your Retirement Budget," U.S. News & World Report, September 5, 2014.

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