No matter how old you are right now, you should already be saving for retirement. Whether you’re contributing to a 401(k), IRA or other long-term investment (or all three), you have to make sure that you’ll have enough money to stop working and have enough money to last the rest of your life.
However, how will you know when you’ve reached a reasonable amount? How can you be sure that your nest egg will sustain your lifestyle during your golden years? Saving is a two-pronged approach: first, you need to put away enough while you’re employed.
Second, you have to know how much you’ll be spending during retirement so that you know when you’ve reached your goal. In this piece, we’re going to discuss how to manage your spending habits when you’ve finally stopped working.
Although everyone’s retirement plan will be unique, there are some general guidelines to consider when planning on an annual budget. According to the Bureau of Labor and Statistics, the average retiree between 65 and 74 spends about $50,000 annually.
Interestingly, once a person gets into late retirement (75 and up), that number shrinks to roughly $37,000. While many factors can influence those figures, they illustrate that, as one gets older, one's expenses are likely to decrease substantially.
One rule that gets thrown around a lot regarding retirement spending is the 80% rule. This rule stipulates that you should plan to spend roughly 80% of your current income during your golden years. In some cases, that figure may be as high as 100% or even more.
Usually, where you live will determine how much this percentage fluctuates. For example, if you retire in a wealthy area where the cost of living is high, your monthly bills will be larger than if you settled in a less austere neighborhood.
Roughly 15% of your retirement expenses will be related to healthcare, which is likely to increase as you age. Whether you have to visit the hospital more frequently, take more medications or get in-home care, healthcare is one expense you can’t afford to skimp on.
Finally, if you plan on living out your golden years by traveling and crossing off items on your bucket list, you can expect to increase your annual spending by at least 5%. Travel and leisure expenses are one reason why those in late retirement don’t spend as much -- once you reach a certain age, jet-setting around the world just doesn’t have the same appeal.
While the 80% rule does give you a baseline for retirement planning, there is plenty of flexibility within that number. Since there are so many various expenses you could be spending money on, it helps to look at them individually. In this section, we’re going to cover the average amount retirees spend on these items and which factors can influence your total.
As you might imagine, most of your retirement income will go toward living expenses. This average total does include everything, such as utilities, property taxes and other maintenance costs. Again, if you live in a high-value area, your monthly total will be much higher. Retirees in California will have to pay a lot more than those living in Missouri.
Fortunately, there are plenty of ways to mitigate a high cost of living. Some of the best methods can include:
If you’re like most retirees, a lack of full-time employment means that traveling becomes more accessible. Since you don’t have to worry about taking time off, you’re free to see the world.
Travel costs go up every year, and as you get older, you’ll have to secure more elderly-friendly accommodations. Also, international travel is going to be much more expensive than domestic trips, so you’ll likely have to plan your adventures accordingly.
Here are some pro-tips for retirees looking to become worldly without the high price tag.
Everyone has to eat, including those in retirement. If you want to split these expenses, most retirees spend roughly $500 on food and another $200 on entertainment.
With so much free time, it makes sense to take advantage of new culinary and cultural experiences. However, while some individuals may acquire a taste for the finer things in life, others might forgo fancy meals and nights on the town.
Fortunately, when it comes to managing your monthly expenses, both food and entertainment are easy to scale up or down. If one month you went over budget, you can cut back the next so that it balances out. Overall, while a five-star dining experience is delightful, you’ll likely want to indulge sparingly to ensure that your funds last longer.
Unfortunately, this expense won’t go down over time, nor is it one that you can control easily. As you get older, your healthcare needs will increase. The only silver lining is that any medical problems may force you to cut back on other expenditures (i.e., travel), so your overall annual budget might not increase too much.
If you have to receive long-term care, the costs can be prohibitive. Whether you stay in a full-time facility or get in-home assistance, the expenses will take a substantial chunk of your nest egg. While long-term care insurance can help alleviate these costs, the monthly premiums are also high.
Although you can’t stop the effects of aging, you can usually slow them down. Here are our top tips for maximizing your health so that you might not have to spend as much on hospital visits and medications.
While housing, food, and travel are the most significant expenses you’ll face during retirement, they’re not the only ones. Here are some other elements you might have to pay for during your golden years.
The best way to save on life insurance is to buy a policy at a relatively young age. However, if you have whole life insurance, your monthly premiums will increase as you get older. Also, if you don’t have a policy now and want to get one, you’ll have to pay more due to your age.
Although life insurance can be a good idea, you don’t have to settle for high premiums. Here are some tips on how to get coverage while cutting down on costs.
In most cases, your retirement costs will be for yourself. However, if you have others depending on you for financial stability, their needs can cut into your nest egg. Some examples of dependents can include:
One of the most significant challenges in retirement is ensuring that you have enough money to last as long as necessary. For example, if your nest egg can only cover 20 years of retirement, what happens when you reach 86? What if you live until you’re 90 or 100?
If you’re worried that your retirement savings won’t keep up with your spending habits, here are some options to increase your revenue stream.
No matter your financial situation, it’s always helpful to work with an advisor. Whether you’re decades out from retirement or it’s just around the corner, we can help you plan for all of your expenses. The more prepared you are now, the more you can enjoy your golden years. Contact us today to see how we can help.
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