One of the hardest things about saving for retirement is estimating future living costs. After all, it’s hard to predict how much inflation will rear its ugly head and how lifestyle changes will change your budget.
Interestingly, 44% of workers age 50 and older believe their living expenses will remain the same when they leave their careers behind, according to the Nationwide Retirement Institute.
At the same time, 34% expect the cost of living to decrease, while 22% expect it to increase. The question is: Who is right?
What will your living expenses look like in retirement?
Without a crystal ball, there’s no telling what your spending will mean with age. But it’s pretty safe to say that many of your current bills will stay the same for the most part, like groceries, clothing, utilities, and other basic basics that we all need regardless of whether we’re working or not.
Now keep in mind that the cost of these items will likely go up over time because that’s how inflation works. But inflation aside, you can probably use the amount you’re spending before retirement as a benchmark for what you’ll spend in your golden years.
You may see some of your costs go down in retirement, such as transportation. Imagine that you no longer need a second vehicle to get to work, so you can offload that expense. Between your car payment, insurance, maintenance and fuel costs, that’s a nice savings. Unfortunately, transportation may be the only expense that drops significantly.
Now let’s talk about housing, because that is doubtful. Your housing costs might go down in retirement if you pay off your mortgage while you’re still working, but property taxes tend to rise over time, and as your home ages, it will require more maintenance and repairs. Therefore, while you may be able to offload your mortgage payment itself, the amount you spend to keep that home afloat can wipe out the associated savings. On the other hand, you also have the option of downsizing, which will give you some breathing room to reduce your housing expenses.
But while many of your living expenses may decrease slightly or stay the same in retirement, the only two that will go up are health care and recreation. It is estimated that the average 65-year-old man today will spend $189,687 on health care in retirement. For the typical 65-year-old woman, the total rises to $214,565.
And since retirement means more free time, it only makes sense to increase your leisure spending to keep yourself occupied. But don’t beat yourself up—those museum outings, local plays, and early-bird deals can add up quickly. Therefore, you better assume that your living costs will not drop significantly in retirement and prepare accordingly.
Saving to finance your future
Most seniors need about 80% of their previous income to live comfortably in retirement, which tells us that the majority won’t be able to lower their living costs by much. After all, financial experts these days are asking employees to set aside 15% to 20% of their earnings for the future, which is great advice. If we get that 15% or 20% back, the 80% revenue replacement goal is about right.
Additionally, 46 percent of seniors spend more money, not less, on living expenses in the first two years of retirement, according to the Employee Benefits Research Institute. For 33% of seniors, this habit continues for six years until retirement.
The punchline, then, is that you need to be financially prepared for the costs ahead, bearing in mind that Social Security will only pick up a portion of that tab. The good news is, however, that if you save consistently throughout your career, or make a big effort to catch up later, you can accumulate enough wealth to cover your expenses and avoid the financial stress that many retirees face today.
If you have another 35 years of work ahead of you and commit to putting aside $500 a month for the future, you’ll end up with roughly $1 million if your investments generate an average annual return of 7% over that time (which is more than achievable). stocks).
If you’re old, you’ll have to grow up. A 401(k) maxes out at $24,500 a year at the current limit between ages 50 and 70, however, and you’ll be sitting on the same $1 million after you retire.
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Although it’s hard to know exactly what your living expenses will be in retirement, don’t assume that they will magically decrease. Be careful, and if you’re lucky, you’ll get plenty of cash to cover the bills that will eventually come your way.
CNNMoney (New York) Posted May 7, 2018: 10:34 am ET