What If Retirement Costs More Than You Expected?

Your retirement plan depends on more than how much you've saved. It also depends on how much life will cost once you get there.

It's easy to picture retirement expenses as some version of what you spend today.

The mortgage may be gone. You're no longer commuting to work. Maybe you're saving less because you're finally using the money you've spent years putting away.

That can make retirement seem less expensive than your working years. In some ways, it may be. But other expenses can take their place.

Before you retire, spend some time figuring out what your version of retirement is likely to cost.

Get a clear picture of your current spending

Pull up the last year of expenses and see where your money actually went.

Start with costs you'll probably carry into retirement, such as property taxes, insurance, utilities, groceries and transportation. Then look at expenses connected to work that may go away.

A year is helpful because it captures the things that don't show up every month: insurance premiums, property taxes, home repairs, annual memberships and the other bills that are easy to forget when estimating a monthly budget.

Put a number on your plans

If travel is important to you, estimate what you might spend on it each year. Do the same for hobbies, entertainment, dining out or projects around the house.

This is where a retirement budget starts becoming personal. Someone who plans to spend most of the year close to home will have a different number than someone hoping to travel for several months at a time.

Neither is right or wrong. Your projections should reflect what you want your retirement to look like.

Take a closer look at healthcare

Employer-sponsored health insurance can make it difficult to know what healthcare will cost once you leave work.

Depending on your age and situation, you may need to account for insurance premiums before Medicare eligibility as well as Medicare premiums, supplemental coverage, prescriptions and out-of-pocket care later.

Long-term care is another expense worth discussing with your financial professional. You may never need it, but understanding how your plan would handle that possibility can help you decide whether additional preparation makes sense.

Leave room for family

For some retirees, helping family becomes a meaningful part of their spending.

That could mean contributing to college costs for grandchildren, helping an adult child or simply wanting the freedom to step in when someone needs it.

If you already know that generosity is important to you, include it in the plan. Otherwise, money given to family can quietly come out of funds intended for your own retirement.

Account for rising prices

Today's spending can give you a starting point, but it can't be the number you use forever.

If retirement lasts 20 or 30 years, even relatively modest inflation will change what everyday life costs. A lifestyle that requires a certain amount of income when you retire will likely require more later.

That needs to be reflected in your long-term projections.

Look at what you'll have available after taxes

Taxes can make a noticeable difference in how much retirement income is available to spend.

The impact will depend partly on where the money comes from. Traditional retirement accounts, Roth accounts, taxable investments, Social Security and pensions each have their own tax considerations.

When you're comparing projected income with projected expenses, use the amount you expect to have available after taxes.

Don't assume every year will look the same

Your first several years of retirement could be some of your most active. You may travel more, spend more time on hobbies or make purchases you've deliberately postponed while working.

That pattern may change as you get older. Travel could slow down while spending on healthcare or help at home increases.

Building those shifts into your projections gives you a better sense of whether your resources can support you through the full length of retirement.

Try the number before you rely on it

Once you've estimated your retirement spending, compare it with what happens in real life.

Track several months of expenses against your estimate. You may find that the number feels comfortable. You may also notice expenses you forgot about or places where your assumptions were too low.

Either result is useful while you're still working and have time to make changes.

You can't know exactly what you'll spend throughout retirement. But you can go into it with a clearer idea of what your life costs, what you want your money to support and how much room you have when things change.

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summary

Retirement spending can be difficult to predict from your current budget alone. Taking a closer look at everyday expenses, lifestyle plans, healthcare, family support, inflation and taxes can help you develop a more realistic estimate. And see how well your plan can accommodate changes over time.