Most people are surprised to find that they will likely have most of the expenses they did prior to retirement. Conventional rules of thumb range from 70 to 90 percent of pre-retirement income. These estimates can work for planning early in your career to see if your retirement savings plan is on track.
But as you edge closer to retirement, take a harder look at your living expenses. Most people focus on their day-to-day spending, but it is critical to include the following big picture items that can make or break your plan:
Taxes - How you take benefits or withdraw money from savings can have a huge influence on your federal and if applicable, state tax bill. If you plan to move to a different location, you will need to examine the tax structure of that state. You may need to consider residency issues if you plan to split your time between locations. You’ll need to budget for real estate taxes as well.
Health care – Most people assume that Medicare covers much more than it does. An annual survey done by Fidelity shows that couples should plan for roughly $15,000 annually to cover things like eye care, dental care, Medicare premiums and deductibles, supplemental medical plans and more. Importantly, this does NOT consider long-term care, which many also mistakenly think is covered by Medicare. If you retire early (pre-Medicare), remember to budget for regular health care insurance.
Long term care – Will you buy insurance to cover this cost, which many of us will need later in life, or will you fund it yourself? Long-term care costs vary widely by region, so you will need to research them for the area where you intend to retire.
Inflation – Costs tend to rise over time. Most people simply look at income vs. expenses in today’s dollars. Will your sources of income also rise? Your expenses almost certainly will.
There are many on-line tools to help get you started. For example, Vanguard has a retirement budget planning sheet. But for more complex issues (like withdrawal strategies or long term care needs), you may want to seek the help of a fee-only planner and possibly a tax advisor.