There are seven big retirement expenses you need to account and plan ahead for. Doing so is going to fully prepare you for this next stage of life.
As we think about retirement expenses, a lot of people think about adding a travel budget or an additional entertainment bucket. However, some of the biggest expenses that you’re going to have are not those. Much of the spending you do while working is actually going to carry over into retirement. Some things might drop off like commuting expenses, but a lot of things carry over.
Expense #1: Healthcare
The first expense is healthcare. If you retire before 65, the average couple could spend up to 17K out of pocket each year until they enroll in Medicare at age 65 (according to Kiplinger Magazine). If you’re 65 the expenses are a little bit less, but over time healthcare spending is likely to be one of the bigger expenses that you face in retirement.
This could change in the future with technology, but it’s something to model into a plan as you map out these expenses.
Expense #2: Taxes
The next expense to think about is taxes. If you’re living off social security, a brokerage, or a bank account, it’s likely you won’t have to worry about a big tax issue. However, if you’re like a lot of our clients, you might realize that taxes in retirement can actually go up. Many times, we see a dip in taxes right after the retirement date. Then all of a sudden we don’t have work income anymore and, a lot of times, taxes decline.
What happens later in life as you get into your 70s is you have to start taking out of your IRAs and pre-tax monies. A lot of times, we see taxes go up for those people who have a lot saved in those pre-tax accounts. Your 70s could be a ways off, but if paying the least amount of taxes over your lifetime is important, then you want to plan for it now.
Right now we’re at historically lower tax rates. This is why having an ongoing system of tax planning, review, and a tax-efficient withdrawal strategy can be so important. I did another video called How to Get More Into Roth. It shows the impact of just a little bit of planning and how it could actually save millions over someone’s lifetime.
Expense #3: Maintaining the Home
The next expense people tend to overlook is home maintenance. If you plan to stay in your home through retirement, you might see home maintenance costs actually increase. Why would that be?
The first reason is that a lot of clients start to value their time in retirement differently than they did before. Take cleaning the gutters or the windows, for example. That’s easy enough to do in the past, but you might get to the age where you’d rather do something else. The value of someone else doing that may outweigh the cost of paying for it, and then you can spend your time on something else that you’d rather be doing, even if it’s just going to the cafe and reading a book.
If that’s not you and you say, “I’m always going to be doing these household things. I’ve done it all my life,” that’s great. However, keep in mind that there’s going to be an age where getting on a ladder to clean the gutters is no longer going to be worth it, just out of health and safety for yourself.
Expense #4: Travel
The next expense that usually increases in retirement is one that is on a lot of people’s bucket lists, and that’s travel – especially right after you retire in those first 10 or 15 years of retirement. Sometimes we refer to this as the go-go years.
Expense #5: Kids & Grandkids
The next expense is kids and grandkids. Whether it’s traveling with them, gifts, or experiences you want to have with them when they’re young. Another big one with grandkids is funding future schooling for them.
Expense #6: Your Health
The next one is an expense, but it’s also like an investment, and that’s just your health and fitness. It is so essential as you’re planning and living in retirement. It’s a need if you want your retirement to be a good one. As you age, you have to prioritize health. Some people even hire a physical trainer just to get them in the right shape when they first enter retirement to create a sustainable routine well into retirement.
The cost of maintaining a healthy lifestyle can add up, and it’s crucial to factor in the gym memberships, the classes, or other health related things like food. The more expensive food is sometimes the more healthy food.
Expense #7: Entertainment
The last one is entertainment. You have the time now to enjoy and explore your passions and interests. Having a budget for this is going to be important in making sure you don’t neglect those 3 C’s we often talk about.
We like to add a separate line item – either on the budget or when we’re looking at the plan – to see if we increase entertainment expenses by x amount, how does it impact the plan? As long as it’s not crashing the plan, then we’re all for spending money on these things.
Categorize Your Expenses Into Two Categories
There are two important things to think about and put these expenses into: the needs and the wants. There are the actual essentials you need to live like housing, medical, food; the things you need to live your normal life.
Separate those things from the wants. You get to decide where everything falls. The reason this is so major is because then, during a time of a longer-than-expected bear market when things are a little less certain than you’d like, knowing exactly what the dollar amount of the needs is and realizing, “Oh okay, we just won’t do this trip right now,” is a quick way to remind yourself things are going to be okay.
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Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.