Forecasting expenses in the distant future, particularly over the span of several decades, poses a considerable challenge. As we funnel funds into our IRAs or 401(k)s, the prevailing sentiment often leans toward a hopeful outlook, with the belief that steadfast financial contributions will pave the way for a cushy retirement. However, there are certain underestimated variables in the calculation of retirement expenses. Being mindful of these five factors could assist in formulating a more accurate and pragmatic retirement budget.
1. Taxes
In addition to pursuing warmer climates, a significant number of retirees are drawn to specific states due to differences in the treatment of retirement income within those regions. Kiplinger shares a list of the 10 Most Tax-Friendly States for Retirees, and that list includes some more well-known retirement hubs, such as Florida and Alaska, alongside states such as Tennessee, Wyoming and Pennsylvania.
However, the prospect of relocating to another state may lack appeal for many retirees, despite the financial incentives. Whether due to proximity to family members or ingrained connections in social and religious communities, many retirees express a desire to stay put in their current states and homes. If this sentiment resonates with you and you reside in a state that taxes income and Social Security benefits, it may be prudent to increase your monthly contributions and save more.
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2. Inflation
When calculating the monthly income needed in retirement, it’s important to consider the impact of inflation. For example, $100 worth of groceries in the year 2001 cost $143.56 in 2021, according to rateinflation.com.
Assuming an annual inflation rate of 3%, an individual who wishes to maintain their current lifestyle at $5,000 per month in 2023 should budget for about $11,783 in 2052.
3. Health care and long-term care
Fidelity suggests that an average retired couple age 65 in 2023 would need about $315,000 to cover health care costs during retirement.
Although it may be unpleasant to think about, there is also the possibility that you or your partner may need to live in a long-term care facility. According to a study by Genworth, a private room in a nursing home costs $315 per day, or $9,584 per month, in 2023.
4. Supporting others
As advancements in science and medicine persistently extend the average lifespan, an increasing number of adults find themselves navigating the challenges of the "sandwich generation." This term encompasses individuals who, amid the evolving landscape of longevity, are tending to the needs of elderly parents while also providing support for their adult children.
According to Pew Research Center, more than half of Americans in their 40s are in a sandwich situation, while 36% of those in their 50s, 27% of those in their 30s, 6% of those under 30 and 7% of those 60 and older are in this situation.
5. The fun stuff
Concluding our exploration of retirement expenses is perhaps the most captivating category often overlooked in budgeting — new (and cherished) hobbies! In retirement, the inclination to explore pursuits previously deferred or embrace entirely novel hobbies often takes center stage.
Travel, too, can incur significant costs, especially when relocating, which may require more frequent trips to connect with friends and family. Budgeting for extracurricular activities and travel will allow you to fully take advantage of the resource that was scarce during your working years — time.
For a detailed retirement planning worksheet, you can check out Equi’s free downloadable worksheet here.
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Disclaimer
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
FAQs
Retirement planning should include determining time horizons, estimating expenses, calculating required after-tax returns, assessing risk tolerance, and doing estate planning. Start planning for retirement as soon as you can to take advantage of the power of compounding.
What are the 5 things you should do when it comes to retirement planning? ›
Retirement planning should include determining time horizons, estimating expenses, calculating required after-tax returns, assessing risk tolerance, and doing estate planning. Start planning for retirement as soon as you can to take advantage of the power of compounding.
What is the #1 reported mistake related to planning for retirement? ›
Answer: Underestimating the impact of inflation. Underestimating how long you will live.
What is the major mistake people make in retirement planning? ›
Most Common Retirement Mistakes
| Rank | Most Common Mistakes | Share |
|---|
| 1 | Underestimating the impact of inflation | 49% |
| 2 | Underestimating how long you will live | 46% |
| 3 | Overestimating investment income | 42% |
| 4 | Investing too conservatively | 41% |
6 more rowsJan 8, 2024
For many people, it's not just about the money. There are other key factors to consider in addition to finances, including lifestyle, family, health, and community involvement.
What are the three big mistakes when it comes to retirement planning? ›
Knowing these pitfalls should help you steer clear and save more.
- Retirement Mistake #1: Failing to take full advantage of retirement saving plans. ...
- Retirement Mistake #2: Getting out of the market after a downturn. ...
- Retirement Mistake #3: Buying too much of your company's stock.
Embrace the 30X thumb rule: Save 30X your annual expenses for retirement. For example, with annual expenses of ₹25,00,000 and a retirement in 20 years, aiming for a ₹7.5 Cr portfolio is recommended.
What is the biggest mistake most people make in regards to retirement? ›
The biggest single error mistake may be pretending retirement won't ever arrive when, for a large majority of people, it does. About 67.8% of men born in 1980 will live to age 65, according to the Social Security Administration. For women, the figure is 80.9%.
What are the 9 retirement mistakes that will ruin your retirement? ›
The top ten financial mistakes most people make after retirement are:
- 1) Not Changing Lifestyle After Retirement. ...
- 2) Failing to Move to More Conservative Investments. ...
- 3) Applying for Social Security Too Early. ...
- 4) Spending Too Much Money Too Soon. ...
- 5) Failure To Be Aware Of Frauds and Scams. ...
- 6) Cashing Out Pension Too Soon.
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
Claiming Social Security benefits too early. Nearly one in five respondents (19%) regretted claiming Social Security retirement benefits too early. The older the respondents were, the more likely they were to express this regret.
What is the number one concern in retirement? ›
1. Saving Enough Money: Perhaps the top retirement concern is the idea that without steady employment, it might be difficult to have enough resources to maintain your preferred lifestyle. The cost of living can be high, and Social Security benefits may not be enough to cover all your living expenses.
What is the biggest financial risk in retirement? ›
Top 3 risks to your retirement funds
- Outliving your money. ...
- Unexpected health care and long-term care expenses. ...
- Market declines and inflation.
Three R's for a Fulfilling RetirementRediscover, Relearn, Relive. When we think of the word 'retirement', images of relaxed beachside living or perhaps a peaceful cottage home might come to mind.
What is a good monthly retirement income? ›
Average Monthly Retirement Income
According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
What is the $1000 a month rule for retirement? ›
The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).
What are the basic steps in retirement planning? ›
Set up your savings to get you to your goal.
- Figure out when you might have enough money to retire. ...
- Consider your expenses, including medical care. ...
- See how your retirement age affects your Social Security benefits. ...
- Make a plan to pay off your debts.
7 key steps for retirement planning
- Start as early as possible. ...
- Be clear about what your retirement goals are. ...
- Create a savings plan and build it up. ...
- Factor in longevity and inflation risks. ...
- Choose the right investment products. ...
- Review your retirement plan regularly. ...
- Protect yourself and your family.
We did the math—looking at history and simulating many potential outcomes—and landed on this: For a high degree of confidence that you can cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time), aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, ...
