Estimate Retirement Expenses In 4 Easy Steps

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The best way to estimate retirement expenses is through the use of your current income as a starting point, then remove or add any expenses you are expecting to change in retirement.

You can sometimes feel as if you are wasting your time when you are saving for retirement. When and how do you know if the money is enough, or how much should you be saving now? All these questions need to be answered to make sure you are on the right track.

Many retirees make the mistake of underestimating how much money they will need in their retirement to be able to have a comfortable lifestyle. Unfortunately, they end up spending more than what was budgeted, this is because they fail to plan ahead or did not know-how.

Change in retirement expenses or spending

retirement expenses

When you determine how much money you’ll need to maintain your standard of living, then it is much easier. Your retirement expenses must be estimated in order for you to determine how much you will need to retire. This can be simply done in a few steps.

  1. What is your monthly net pay? This is what you receive after all the retirement plans, deductions for taxes, and insurances have been removed.
  2. What are some expenses you’ll have to start paying from your pocket immediately you retire, e.g health insurance?
  3. What other expenses are you planning to budget for during your retirement? This will consist of travel expenses or other money for medical expenses.

Ensure you also save for items that will need to be replaced later such as automobile purchases or major home repairs.

You may also see a decrease in certain expenses when in retirement. For instance, if you always travel a long distance to work, when you retire, the transportation costs will surely drop after you retire. Your dry cleaning bill may also decrease after retirement if you always dress up for success at work before.

If your mortgage is paid off before you retire, a significant monthly expense would have been cut off.

How do you add up your retirement expenses?

retirement expenses

This can easily be done by using the below example as a case study.

  1. Let’s assume your current net monthly pay is $5,600 per month (which is $67,200 per year).
  2. Let’s also assume your health insurance premiums, $350 per month, are paid by your employer, this is called expense covered by your employer. It means you will have to pay $4,200 per year when you retire.
  3. You may also budget $500 per month for extra expenses like traveling, this will amount to $6,000 per year for traveling.
  4. Housing: Your mortgage will most likely be paid off, so you will only need to be paying insurance and taxes on your home. That will cut around $1000 per month from your spending.

Totaling all the expenses, you estimate a retirement expense to be $3,520 every month, $42,240 every year. If that amount is multiplied by how many years you expect to live in retirement, then a good starting target for your retirement account will have been determined.

Thoroughly follow these steps when you are estimating your retirement expenses. Although it is very common to forget some expenses whether it is items that occur annually such as insurance premiums and real estate taxes, medical bills such as eye care, dental and haring, or some periodic expenses like auto repairs and home upkeep.

Tax estimate in retirement

retirement expenses

Unless you solely rely on social security as your only source of income, you will most likely pay taxes in retirement. An estimated tax rate, like 25%, can be used, which is far better than not estimating for tax at all. But a tax projection will need to be done to be more accurate on how much you will pay, and set up your tax withholding or quarterly payments.

An estimate of what you do before the end of the year that shows what your tax return will probably look like is called a tax projection. This is very important if you have rental properties, mortgage interest, or if most of your retirement income will be from investments that are not inside a retirement plan.

If most of your retirement income will come from qualified retirement plans like IRAs, 401k, or maybe you have a pension income and your mortgage is paid off, your tax rate may be higher than you expected in retirement. Payments from an estate to which you may be part of the beneficiaries and military retirements are examples of pension plans.

Calculating retirement expenses

To make this simple, and to finish the example above, an estimated tax rate will be used. So, let’s assume a 20% marginal bracket for the person in the example above, and that majority of his income comes from fully taxable retirement account withdrawals.

  • $42,240 / (1- .20) = $52,800

From above, your net income is divided by 1, and subtracting your expected tax bracket will give you the gross amount you will need to pay your taxes and other expenses.

So in order to retire comfortably, the person above will need a gross income of around $53,000 yearly.

To be clear, here is the simple breakdowmnof the gross income, expenses and taxes in the example above:

  • $52,800 x 0.20 = $10,560 (Estimated taxes)
  • $42,240 (living expenses) + $10,560 = $52,800

Once an estimate of what you’ll spend every year is calculated, you can then move to the next level in the planning process and start adding up your guaranteed income source you know how close to covering your expenses you are.

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