Estimating your expected expenses when you retire is the first step you should take if you’re nearing retirement. You certainly don’t want to throw any money away, but there may be some costs you’re forgetting about.
Sure, you’ll want to add spending for travel or hobbies if those are things you want to pursue when you retire, but what about everyday expenses? There are plenty of those you could be skipping over when trying to estimate your retirement expenses.
So, before you start to calculate how much money you need for retirement, here are some expenses you can’t afford to forget.
Housing can be a major cost to consider regardless of where you decide to live when you retire. Perhaps you want to live in a condo or retirement community.
These communities may incur additional costs such as a homeowners association fee in addition to your mortgage. You also may want to consider the higher costs for things like assisted living or a nursing home.
Remember that costs could go up depending on the type of housing and care you need, so factor in any potential increases as you get older.
You may have a goal to have your home paid off when you retire, but property taxes will remain with you. Make sure you know how much your annual property taxes will cost and keep in mind they will likely go up in the coming years, depending on the assessed value of your home.
If you have a mortgage, then you probably already have an escrow account to set aside property taxes every month.
If you don’t have an escrow account, it might be easier to set aside a little into a savings account each month than pay out when a big property tax bill comes due.
Your estimated budget should include many types of insurance. You may need insurance for your home and car as well as life insurance. And if you’re concerned about the need for more health insurance, you may want to consider long-term care insurance.
You also may want to change a policy as your circumstances change. Seniors may be throwing money away on policy coverage that hasn’t been adapted to fit particular lifestyle changes.
Utilities are another housing expense you can’t afford to ignore when you make a budget. Think about all the bills you pay to keep your house running, including gas, electricity, and water.
You also want to take into account cable or internet expenses if you want to spend your retirement years catching up on shows or reaching out to friends and family.
You may be surprised to find that Medicare doesn’t cover all of your medical expenses. Medicare Part B (medical insurance) may have a monthly premium and an annual deductible.
You may also want to get supplemental insurance or a Medigap plan. And Medicare Part D, a prescription drug plan, may cost extra too.
Pro tip: As you get closer to retirement age, it may also be a good idea to invest in long-term care insurance, which could cover medical care as you get older as well as a nursing home or other specialized care.
Groceries could be a significant expense on a fixed income, but there are ways to save money on groceries if you’re worried about fitting that expense into your budget. Perhaps you want to get in the habit now of clipping coupons or saving money at a warehouse retailer like Costco.
You’ll also want to budget additional costs for dining out, particularly if you’re a foodie who may want to visit higher-end restaurants when you have more time to do so during your retirement.
Traveling is on the list of many people when they decide to retire, but it may not be cheap. You might want to travel internationally, which costs more than domestic travel. Or perhaps you want to stay in higher-end accommodations and want to spend additional cash to really enjoy your visits.
The costs of traveling can add up quickly, so remember to factor in any potential expenses and pad your estimates if needed.
Pro tip: If you’re looking forward to road trips when you’re retired, there are ways you can save money on gas you should know before you hit the road.
Retirement may bring extra chances to go out and do things or travel. You may have to add a car payment and insurance to your budget as part of your retirement expenses.
And consider additional funds for things like Uber, Lyft, or other types of transportation if you need someone to drive you somewhere.
It’s good to have an emergency fund when you’re retired just as you have one now. An emergency fund can cover unexpected costs like home repairs, medical bills, or fixes to your car.
You also may want to earmark additional cash for your emergency fund in retirement since you won’t have income from a job to replenish money you need to pull out.
You may have credit card debt, a mortgage, or a car payment. You might also have a loan you’ve taken out with a bank or financial institution for any number of items.
These debts don’t disappear just because you retire, so factor in your monthly payments on these additional costs as part of your retirement budget.
Retirement investment taxes
Some investments, such as a Roth IRA, are not taxed when you withdraw from them after you retire. But other retirement investments, such as a 401(k) or traditional IRA, may be taxed when you’re ready to take out the funds to use during your retirement years.
It’s a good idea to contact a financial planner or accountant who specializes in retirement taxes to assess how much you may owe and how they may affect what you’ve saved so far.
And don’t forget about the required minimum distribution (RMD). At age 72, retirees must begin to take a portion of their retirement savings each year and pay taxes. You can download an IRA Required Minimum Distribution Worksheet from the IRS website.
You may not be surprised by expenses in your later years if you plan your retirement budget now. Take into account everyday expenses and paying down debts like a home loan or car loan.
Remember to budget for one-time events like a trip to Europe or a cruise to Alaska. And be sure you have saved money for any unexpected costs that may crop up as you get older.
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