You've been dreaming about your golden years for ages, but have you fully prepared for the financial aspect of retirement? While you'll have many of the same bills in retirement, some expenses change, and the way you spend your money might shift. Understanding common retirement expenses can help you plan while you're still working, and it can help you stretch your retirement savings to avoid running out of money. Explore common retirement expenses and how to plan for them below.
Fidelity suggests planning to spend between 55% and 80% of your current annual income once you retire. If your income from your job is $100,000, you would likely need between $55,000 and $80,000 per year in retirement. Estimating at the high end of 80% gives you a buffer in case your retirement expenses are higher than expected. Ultimately, your retirement lifestyle will determine how much money you'll spend. If you plan to travel regularly and stay active, you'll spend more than someone who stays close to home and spends their time on hobbies.
After retiring from your job, you can also retire certain expenses, such as work clothes, work lunches at restaurants and commute expenses. However, you'll likely see your costs increase in other areas, such as healthcare and funding your retirement activities. Common retirement expenses include:
You can also face unexpected expenses in retirement, such as necessary home or auto repairs. If you have children or grandchildren, you might find yourself paying for some of their expenses or helping them out of a difficult situation. Having an extra emergency fund can protect your retirement money while preparing you for these unexpected expenses.
Preparing for retirement expenses as soon as possible gives you more time to increase savings, pay off debt and handle other financial situations. The following tips can help you better prepare for your retirement expenses.
You've likely envisioned your retirement years already, but it's a good idea to spend time analyzing exactly how you want your retirement to look. Ask yourself questions about retiring, such as:
Understanding how you want to live after retirement helps you estimate the costs to fund that lifestyle.
Create a preliminary retirement budget before you leave your job. Figure out how much income you'll have after you retire, including Social Security, retirement accounts and other investments. Estimate the expenses you'll have based on how you want to live, and allocate your retirement income accordingly. If you come up short, consider ways you can decrease your expenses and increase your income, such as making larger retirement contributions before you leave the workforce.
Financial stability before you retire makes retirement expenses easier to handle. Building a large emergency fund gives you a backup plan if you face unexpected expenses, and dealing with debt ahead of time can help to decrease your financial burden. Going into retirement with less debt leaves more of your retirement funds to go toward regular living expenses.