How to Manage Your Living Expenses to Plan for Retirement
by Arnab Dey Finance 22 January 2022
In a perfect world, you’ll be able to retire whenever you want as long as you worked hard and saved enough in your pension fund. But alas, this world is anything but perfect. Many 60-year-olds still find themselves mulling the possibility of working for five years or more until they can afford to retire.
You need to know that once you add up your Social Security, retirement savings, and pension, that may still not be enough to retire if you don’t manage your living expenses.
The power to retire depends on how much you need to have a comfortable retirement. Even if you are expecting $5,000 a month, that is still not enough if you still have to pay for your home, settle your credit card balances, and maintain an expensive lifestyle.
Computing Your Retirement Living Expenses
You need to consider all the expenses you will incur monthly in retirement. The monthly expense includes your regular living expenses plus insurance premiums, taxes, gifts, and home maintenance.
Other fees will consist of the cost of your medical insurance and out-of-pocket premiums, as well as the possibility of long-term care.
But also remember that your monthly expenses will change when you retire. You aren’t going to drive or commute to and from the office. You’ll save a ton of gas money and train tickets. Instead of buying your lunch from a diner or fast food, you can whip up something healthier at home. Deduct these from your expected retirement living expenses to come up with the best picture.
At some point, you will also finish paying for your home’s mortgage. That money can go directly to your retirement savings. And once you reach 65, you’ll be eligible for Medicare which can save you from hefty medical costs.
However, there are also more unforeseen expenses in retirement. You might need long-term or assisted-living care. You will need to pay for either the facility or a stay-at-home caregiver. If you need medical attention at home, you’ll need to hire a private nurse. That will cost tens of thousands of dollars.
Expenses During Early Years vs. Later Years of Retirement
Do you plan to travel more in the early years of retirement? People plan on retiring early because they want to be young enough to travel the world. This means that your retirement living expenses will include travel costs. Where do you plan to go? Are you going to source the travel costs from your retirement income, or do you have separate savings account for that?
It is also true that your expenses will change in the later years of your retirement. You will incur more costs for medical care. If you have a partner, you have to consider their medical expenses, too.
Many people believe that Medicare will cover most, if not all, of their medical expenses once they turn 65. But that is not true. You still pay insurance premiums and co-pays for some items. Medicare also does not cover 100% of prescription drug costs and it will not cover long hospital stays. Some people with a lot of prescription drugs pay over $7,000 a year in medical bills even with Medicare!
Taking Inflation Into Account
You also have to factor inflation into your retirement living costs. Even though you will save on some basic expenses such as gas, food, and mortgage, the inflation rate will cause all others to increase.
It will be the break-even factor. Fortunately, Social Security is ready for inflation. It means your pension is going to be adjusted according to inflation. This is why today is the best time to maximize your Social Security income.
Some experts advise retirees to consume less in retirement. But after spending most of your adult life working hard, don’t you think you deserve to have a nice retirement?
The best way to offset the increasing prices caused by inflation is to make sure your retirement income can keep pace with the expected inflation rate. The sources of your retirement fund should increase with inflation.
The best way to keep pace with inflation is to have a separate inflation account. Spend only 75% of your retirement fund every year and keep the 25% in your inflation account. Next year, you can add 2% to 3% to the amount you spend to account for inflation. Deposit the rest in your inflation account.
Continue doing this until you’re spending your whole retirement income. Then, when it can’t keep up with rising living expenses, draw funds from your inflation account.
If the above-mentioned strategy isn’t possible, resort to downsizing your lifestyle. Move to a smaller home. Buy a low-maintenance car. The bottom line is to live within your means if there’s no way for your retirement income to be at pace with inflation.
The Takeaway
Planning your retirement takes a lot of time. It is also overwhelming. There are so many details you need to take into account. But the key here is to start planning early to prepare for the curveballs.
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