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Figuring Retirement Expenses — The Challenges and How to Do It

Figuring Retirement Expenses — The Challenges and How to Do It

July 26, 2021

Do you want to start or improve your retirement planning? One of the most challenging elements of retirement planning for most Americans is estimating how much money they will need during retirement. Why is this so difficult? And how can you make it easier for you? Discover what you need to know about this tricky but vital subject. 

Why Are Retirement Expenses Hard to Figure?

Forecasting your budgetary needs is always a challenge because no one can foretell the future. Anything can change — and often does. But retirement planning is particularly difficult as it should start decades ahead of time. Every individual must rely on estimates, including the cost of living changes over many years and their own income earning power throughout their career.

In addition to being reliant on estimates and guesswork, you have no clear, one-size-fits-all consensus on how your expenses will change in retirement. While some trends are relatively standard — such as that health insurance will cost more — other factors, like how much you spend on work-related expenses, are unique to each person. And often, suggestions for planning rely on overgeneralizations. 

Finally, retirement means different things at different stages. Younger retirees may keep up part-time work or travel a lot. As they age, they may slow down while seeing expenses like healthcare rise. Because retirement itself isn't a static time period, planning is often a moving target. 

What Estimation Methods Might You Use?

Approach estimating retirement needs in several different ways. Some people use a percentage of their current income. A common rule of thumb is 80% of current income to maintain a person's current lifestyle during retirement. This factors in the drop in income and payroll taxes as well as reductions in work-related expenses.

Another method is to work from current expenses and add or subtract expenses based on retirement activities. For instance, if you plan to pay off your mortgage before retiring, you can reduce your housing expenses by this much. However, if your employer subsidizes some or all of your health insurance, you would need to increase this category in your budget when paying on your own. 

Unfortunately, both of these methods may not fully consider the effects of irregular expenses like annual payments for insurance, property taxes, or a vacation. You might account for these by turning current monthly expenses into an annual dollar amount. Then, this amount is divided into a few major categories and translated to percentages. These percentages are then projected onto future dollars.

How Can You Make the Job Easier?

Clearly, you have many choices as to how to tackle the problem of retirement expense planning. How should you choose?

Generally, each individual should use a method that they are more likely to understand and apply. If you're not one who enjoys detailed number crunching, attempting to wrestle all your monthly bills into projections for 10 or 20 years in the future could be overwhelming. The result may be frustration, wildly inaccurate estimates, or even giving up entirely. In this case, an annual or percentage method could be better. 

In addition, remember that retirement planning is a fluid project over many years. You might start out early in your career using standard amounts such as the 80% rule but then change to a more detailed budget as you approach retirement. In most cases, any attempt to plan for retirement is better than procrastinating until later life or avoiding the subject entirely. 

Where Should You Start?

The best way to figure out how you should plan for retirement income and expenses is to work with an experienced and trained financial planning professional. Presidio Wealth Management can help. Our team will help you find the right path to accurate planning, no matter your circumstances, goals, or interests. Call today to get started.