How to Plan for Retirement Costs

by on June 27, 2012

A big part of planning for retirement is estimating your expenses during retirement.  Some people will need more money than they currently spend and others will need less, but when it comes to making assumptions, here are three things that you should take into consideration.

Plan for Taxes During Retirement

Most people underestimate the amount of taxes they’ll have to pay during retirement, and here’s why.  First of all, your social security income will be taxable, or at least some of it.  Most people don’t plan on that but the tax thresholds on this are rather low and most people are required to pay taxes on their social security income during retirement.  Second, most retired people lose a lot of their tax write offs and deductions.  That’s because retired people often don’t have any of the mortgage interest deductions and other deductions that can be itemized and used to reduce your tax rate.  That may mean that you’ll be paying a higher percent income tax.  Also, remember that all of your income from retirement accounts like pensions, IRAs and 401ks will be taxable.  While you won’t have to pay social security taxes or unemployment taxes on these withdrawals, you’ll still need to set aside money to pay your income taxes.  And because you may be getting income from pensions, social security and retirement accounts, the amount of income you are taxed on could be higher than you estimated.

Health Care During Retirement

tips to plan for retirement spendingFidelity Investments estimates that the average 65 year old couple will need about $400,000 in out-of-pocket health care costs throughout their lifetime, and that doesn’t include long term care if one should need it.  Because health care costs have rising at nearly twice the rate of inflation, this is a cost that could easily be higher than you expect during retirement.  Also, while basic Medicare is free, the supplemental plans run on average $6,500 a year.  If you’re not used to paying insurance premiums now because your employer does, this is something that can easily be overlooked when planning for your retirement.

You May Spend More During Retirement

Many financial planners recommend that you plan to spend 75% of what you spent when you were working.  However, if you want an active retirement lifestyle, you may need to raise your budget.  Travel in particular can be a large expense and often works out to be much larger than most people budget for.  And because you are spending this money at the beginning of your retirement, it takes a bigger toll on your nest egg than spending the money after it has had time to grow in your account.  Also, if you plan on getting involved with your children or grandchildren, you should consider the costs of traveling to see them or even potentially buying an apartment or condo near them.  When you think about this expense, try to visualize how you want to live your life during retirement.  If it involves lots of activities, then you may want to raise your budget.  Remember, you’ll have more time to spend your money than when you were working.

It’s important that you take these factors into account when planning for your retirement costs.  Are there any other retirement costs that you’d add to this list?

{ 3 comments… read them below or add one }

Felicia Gopaul July 26, 2012 at 2:53 pm

Anything can happen when retirement comes. The key is having contingency. Start paying yourself now for your retirement, Even in small amounts as long as you start as early as you can.

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Pensions Advisor Norwich September 19, 2012 at 6:31 pm

Some useful pieces of advice in this article.
It is mentioned that: ‘Many financial planners recommend that you plan to spend 75% of what you spent when you were working’. That of course is all fine, but the actual fact is that only very few people will be able to sustain a pension income of ~75% of their pre-retirement income after retirement. The real planning ‘devil’ lies in the obvious fact that most people have little or no idea of just how long their assets will have to last. So, in many cases significant elements of ‘drawdown’ can prove perilous as longevity becomes more prevalent. So, a secure ‘steady-state’ income is thus often to be preferred even if it means income at a lower level than ideally preferred.

Retirement Options

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Antonio Kevin October 29, 2012 at 3:41 pm

Well that’s great. This really helped me a lot when it comes to deciding what I want to do next after I retire. I know it’s my time to relax now, I’ve already done everything I need to.

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