Author: Kailey Fralick | August 01, 2019
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A good retirement starts with a good plan
Many Americans are at a loss as to how much money they need to save for retirement, and as a result, they often don’t save enough. Maintaining your financial security into old age requires a detailed estimate of your retirement living expenses, so you know how much you need to save each month and overall. Here are 18 things you need to include in your retirement budget if you want to have all your bases covered.
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1. Housing
Housing is most retirees’ largest expense. Out of the $49,952 the average household headed by an adult 65 or older spends each year, $16,668 of that goes toward housing, according to Bureau of Labor Statistics data. Depending on your living situation, this may be a rent or a mortgage payment. Paying off your home before retirement can cut down on your expenses considerably, though you’ll still have to pay property taxes.
There are ways to reduce your housing costs in retirement. You could downsize your home, move to a more affordable area, or rent out an extra room. Snowbirds or frequent travelers should consider renting out their entire home while they’re away to generate additional income.
ALSO READ: Retiring Soon? Should You Downsize Your House?
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2. Food
The average retiree household spends about $6,326 on groceries per year, but your grocery costs may be lower or higher depending on the number of people in the household, their appetites, and the types of food you buy. Where you live can also impact how expensive your grocery costs are. Use your current monthly grocery bill as a jumping off point for estimating your grocery costs.
Don’t forget to include dining out as well. These expenses could increase or decrease in retirement, depending on your habits. Eating out can be five times more expensive than preparing the same meal at home, so you’ll have to save a lot more if you intend to dine out often.
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3. Healthcare
Fidelity estimates the average 65-year-old couple today will spend about $285,000 on healthcare in retirement. Other surveys put this number as high as $363,000 for households with high medical costs. If you’re a long way off from retirement, you’ll need even more because medical costs will continue to rise and the medical inflation rate often outstrips the general inflation rate. The above figures represent your out-of-pocket costs, not including the portion that Medicare pays on your behalf, so don’t be fooled into thinking your insurance will cover all of it.
Do your best to maintain a healthy lifestyle to minimize your healthcare costs in retirement. If you plan to retire before you’re eligible for Medicare at 65, budget even more for healthcare to account for the extra years you’ll have to pay for your own private health insurance.
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4. Taxes
Unless all your retirement savings are in Roth accounts, you will owe some taxes in retirement. How much depends on how much you withdraw from tax-deferred retirement accounts each year and how much you have coming in from other sources like a side hustle or Social Security.
Many retirees find their expenses stay the same or decrease slightly in retirement, so you could end up paying less in taxes, but it also depends on how the tax brackets change over time and there’s no way to predict this. You can use today’s tax brackets and your estimates of your other living expenses to get a rough estimate of what you might owe, but you should give yourself a little extra cushion just in case.
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5. Transportation
Transportation costs include gas and vehicle maintenance. Urban dwellers may not have a vehicle of their own, but then they’ll have to pay for public transportation. If you do have a car in a city, you can expect extra expenses like parking. In the unfortunate event that you car breaks down or is totaled, you may have to purchase a new one so you can get around.
The average retiree household spends about $7,513 on transportation expenses, according to the Bureau of Labor Statistics. But again, your transportation costs could be much lower or higher depending on where you live and how often you travel.
ALSO READ: How Much Does It Cost to Own a Car?
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6. Travel
Many retirees use their newfound freedom to travel the world, but this is not cheap. In retirement, you can’t decide on a spur-of-the-moment trip because you’ll have to take away money from your food, housing, or healthcare budget, and that could leave you without enough to cover your basic living expenses down the road.
If you know you want to travel in retirement, start planning for it now. Figure out where you want to go and price out the cost of the trip. The cost of traveling to that country could change over time, but this will give you a ballpark estimate.
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7. Big-ticket purchases
Some retirees prefer to stay closer to home but may want to buy some larger items, like a boat, a new entertainment system, or a cabin on a lake somewhere. If you know you want to make a big-ticket purchase in retirement, price out how much the item will cost and keep in mind any insurance, maintenance, or upkeep costs associated with it. Add this amount to your retirement budget.
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8. Utilities
It’s easy to forget about the little monthly expenses, like your electricity, water, and gas bills. You may also have to pay someone to come by and collect your garbage once in a while. These are services you can’t live without, so you must build them into your budget.
Use your current utility bills as a reference point, but you may have to adjust this up or down if you plan to move in retirement because a larger or smaller home or moving to a new area could impact how much these utilities cost you.
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9. Insurance
You’ll still need auto, homeowners or renters, and health insurance in retirement. Costs for home, auto, and renters insurance are highly individual and depend on where you live, your home or vehicle, and your previous claims history. Use your current insurance rates as a baseline but know that these could go up or down over time.
Most retirees use Medicare for their primary health insurance, and this has its own deductibles, copays, and premiums. Medicare Part A is free for most adults and Medicare Part B charges the same amount to all but the highest earners,…