Retirement expenses

Putting away your money for retirement can sometimes feel like you’re aiming at a moving target. How much should you be putting away right now? How can you know when you have enough?

One of the biggest mistakes that many retirees make is underestimating how much they will need to spend in retirement to have a comfortable lifestyle. They end up overspending, because they didn’t plan ahead or didn’t know how.

It’s a much easier task when you have an idea of how much you will need to maintain your standard of living. To determine how much money you will need to retire, you must estimate your retirement expenses. This is something you can do in a few simple steps.

A good way to begin to estimate retirement expenses is to use your current monthly income as a starting place, and then add and subtract any expenses you expect to change in retirement. What is your monthly take-home pay? That is what gets deposited to you after all deductions for taxes, retirement plans, and insurance. What expenses come out of your paycheck that you will have to pay out of pocket once you are retired (for example, health insurance)? What extra expenses do you want to budget for during retirement? These would include things such as travel or more money for healthcare expenses. It’s also likely that you will see certain expenses decrease in retirement. For example, if you have a long commute to work, your transportation costs may drop after retirement. If you must dress for success at work, perhaps your dry cleaning bill will decrease in retirement. If you pay off your mortgage before retirement, you’ll cut out a significant monthly expense.

Let’s work through an example to see how this might work. Current monthly take-home pay: $4,300 per month ($51,600 per year). Expenses covered by your employer: Currently, your employer pays for your health insurance premiums. You learn that once you are retired, you will have to pay $350 per month ($4,200 per year) for this coverage. Extra expenses: You plan on traveling in retirement, so you budget an extra $500 per month ($6,000 per year) for travel. Housing: Your mortgage will be paid off, so you’ll only need to pay taxes and insurance on your home. That might cut out $1,000 per month from your spending.

The Balance