When planning for retirement, it is important to include all of your potential expenses. This can be tricky, as there are many different factors to consider. In this blog post, we will discuss the 7 categories of retirement expenses and then provide a list of 65 specific expenses you will want to include in your retirement spending plan. By taking into account all of these costs, you can create a realistic plan that will help you enjoy a comfortable retirement! You may utilize the Retirement Budget Calculator for free to assist you to plan your spending for retirement.
7 Categories Of Retirement Expenses
- Housing
- Loans & Liabilities
- Food & Personal Care
- Insurance & Medical
- Vehicles & Transportation
- Travel & Entertainment
- Giving & Miscellaneous
Now let's look at the retirement expenses you'll want to include in each category.
Housing
Here is the data provided in the Retirement Budget Calculator's template. You may add and delete data to make your retirement expenditure strategy unique to you in the calculator.
- Real Estate Taxes
- HOA Dues
- Electric
- Garbage
- Water
- Sewer
- Natural Gas
- Cable
- Internet
- Cell Phone
- Home Phone
- Security System
- Home Improvements
- Furniture
- Yard Maintenance
Loans & Liabilities
- House Mortgage
- Auto Loan
- Boat Loan
- Credit Card
- RV / Camping Trailer
- Student Loan
- Alimony
- Child Support
Food & Personal Care
- Groceries
- Restaurants
- Spending Cash
- Haircuts and Nails
- Dry Cleaning
- Pet Food and Medicine
- Gym Membership
- Clothes and Shoes
- Chiropractor
Insurance & Medical
- Auto Insurance
- Home Owners Insurance
- Health Insurance
- Dental Insurance
- Life Insurance
- Long Term Care Insurance
- Medicare Supplemental Insurance
- Vision & Eyecare
- Medications
Vehicles & Transportation
- Annual Tuneup
- Fuel
- Oil Change
- Maintenance
- Tires
- Repairs
- Memberships
- License Renewal
- Public Transportation
Travel & Entertainment
- Vacations
- Birthdays
- Christmas
- Anniversary
- Amazon Prime
- Hobbies & Lessons
- Magazines and Newspapers
- Software Subscriptions
- Netflix
- Movie Rentals
Giving & Miscellaneous
- Tithes & Offerings
- Missions
- Charitable donations
- Financial Adviser
- Tax Preparation
Remember To Include Taxes
We all know taxes are a necessary evil, but did you know that they can also be a significant expense in retirement? That's right - taxes can eat up a good chunk of your retirement income if you're not careful. You will want to include both state and federal taxes in your retirement spending planning.
There are a few ways to reduce the amount of taxes you'll owe in retirement. One is to consider doing ROTH contributions and conversions as you prepare for retirement. Another is to carefully plan your withdrawals from those accounts so that you don't end up in a higher than necessary tax bracket.
Essential vs Discretionary Expenses
Retirement Budget Calculator can help you figure out how much you need to spend in retirement and you can tag your expenses as either essential or discretionary Here's a quick rundown of the difference between essential and discretionary expenses:
-Essential expenses are those that you need to live, such as food, shelter, and clothing.
-Discretionary expenses are those that you can live without, such as entertainment and vacations.
Some people choose to retire on a shoestring budget by eliminating all nonessential expenditures. Because you didn't work hard to get to retirement only to survive, most individuals will want to include discretionary expenses.
The Goal Of Retirement
The goal of retirement is cash flow. It's all about making sure you have enough income to cover your expenses. You can start to project how much income you'll have in retirement and then compare your guaranteed income to your costs. Some of the most common sources of income in retirement are Social Security benefits, pensions, annuities, or rental income.
The Gap
Normally, your income sources will not cover all of your expenses in retirement. This is where your retirement savings come into play. You will likely need to supplement your income with withdrawals from a 401k, IRA, or other retirement accounts.
After entering all of your income and expenses into the calculator let's say you discover that you will have $50,000 dollars of income every year. But your expenses are $90,000 per year. The gap in this scenario is $40,000. It is the difference between how much income you have compared to how much you plan to spend.
Have You Saved Enough To Cover The Gap?
The general rule of thumb is that you will take the gap number and multiply it by 25. This is based on the 4% rule that says you can safely withdraw up to four percent of your retirement savings each year without depleting your account. In the example above, you would need one million dollars saved to cover the forty thousand dollar gap.
Asset Allocation
If you are going to use the 4% rule you will want to make sure you have the correct asset allocation of your investments. The goal is to have a mix of stocks and bonds that will give you the best chance to not only cover your expenses but also keep up with inflation.
The research on the 4% rule found that a 60/40 mix of stocks and bonds is the sweet spot for most investors. This means that if you have a one million dollar portfolio, $600,000 would be in stocks and $400,000 would be in bonds.
Even though this combination has been shown to work, it does not factor in your risk tolerance and it's vital to note that past success is no indicator of future performance.
Withdrawal Order
How you choose to take money out of your different accounts could play a role in how long your money will last in retirement. The conventional wisdom is to withdraw from taxable accounts first and then move to tax-deferred accounts like a 401k or traditional IRA and save your tax-free accounts to last.
However, this is not always the best strategy because how much taxable income you have can impact other things such as how much you will pay for health insurance in the years leading up to age 65 or how much of your social security will be taxable.
Another advantage of the Retirement Budget Calculator is that you may alter the withdrawal sequence. This allows you to experiment with different withdrawal strategies to figure out what would be the best approach for you.
In Summary
So, how do you know if you’re on track for retirement? The answer is simple: just compare your retirement income to your expenses. If your guaranteed income such as social security is not enough to cover your expenses then you will need to determine if you have saved enough to cover the gap between your income and expenses.
We developed the Retirement Budget Calculator to help you create a retirement budget and obtain a clear feel for what your expenditures will be in retirement.
You can sign up for free to develop a retirement spending plan that makes it simple to see how much money you'll require each year in retirement. Don't put it off any longer!
