Retirement Savings: Calculating Retirement Expenses
Saving for retirement is something you’ve likely heard about since the time you got your first job. When you’re young, however, saving for something that is 40 plus years away doesn’t seem like a top priority. Before you know it, time flies by and you’re a few years out from retiring, drowning in debt, with minimal savings. This story is true for many. Of those that do have savings, many of them don’t have enough money to survive beyond their first five years of retirement. To prevent the need to return to work after retiring or struggling for the rest of your days, it is essential to plan for your future. Having a ballpark idea of what you’ll need to survive can help.
Understanding Your Expenses
How much will you need to retire? Whether you’re five years away from retiring or twenty, in order to create savings goals, you need to have some idea of what your finances will be like once you retire. Will you have a mortgage? Credit cards? Medical expenses? Below are some of the most common retirement expenses to budget for:
- Housing – much like when you were working, housing costs will be the biggest part of your retirement budget. Whether you’ve paid off your mortgage or not by the time you reach retirement age, you’ll be forever responsible for things like property taxes, insurance, maintenance, and utilities.
- Healthcare – unfortunately, as you age the need for medical care and treatment will increase. You’ll need to have a general idea of how much you’ll have to pay for Medicare premiums, prescriptions, and other medical care.
- Taxes – retirement planning experts urge their clients to set aside money in their budget for taxes. Though you’re no longer employed, you’ll be required to pay taxes on 401K and IRA withdrawals as well as taxes on social security benefits.
- Food – you still have to eat during retirement so you’ll need to calculate the cost of groceries
- Entertainment/travel – do you plan on taking trips or going out for a night on the town during retirement? If so, you’ll need to start saving for those entertainment expenses.
- Emergencies – life emergencies will always occur and you’ll need to budget for it. The loss of your spouse, your children needing to borrow money, and a host of other things could go wrong that you need to be prepared for.
- Debt – hopefully, by the time you retire you’ve paid down all your debts. However, if you still have student loans, credit card debt, and outstanding loans you’ll need to repay them.
Ways to Save for Retirement
Now you have a general idea of how much you’ll need to survive each year of retirement. Set a savings goal that will meet or exceed your annual costs. Then, begin looking for ways to start saving for a financially sound future. Here are some methods to start today:
- Cut Spending – look at your current budget and find ways to cut back on spending. You may find that you’re spending too much on entertainment and travel or that you’re wasting a lot of money by letting outstanding debt accumulate interest. Reducing those expenses frees up money that can be added to your retirement savings.
- Increase Contributions – if you presently have a 401K, IRA, or pension through your employer, you can boost your savings by increasing your contribution. Even an additional few dollars every pay cycle can increase your bottom line.
- Tackle Debt – Now is the time to start chopping down that debt. Pay your mortgage bi-weekly, pay off high-interest rate credit cards, get your student loans under control, and work with collection agencies to clear up your credit. There are several ways you can begin tackling debt over time including the snowball effect which has proven very effective for many.
- Get help – Sometimes, it can be hard to see where your weaknesses lie, come up with a goal, and actively work towards that goal. Getting help from a financial advisor who offers wealth management and retirement planning services is recommended. They can help you find areas where you can reduce spending, increase your income, and boost your savings.
Your future is in the palm of your hands. Most think of retirement as something that is decades away. Though it may seem that you should essentially, “cross that bridge when you get to it”, failing to plan can make for a seriously stressful retirement. Whether you’re just a few years shy or are several years away from retiring, now is the best time to start planning. By saving for retirement now, you can set yourself up for a happy and prosperous future.