AUTHOR BIO
Mike Ballew is a professional engineer and the founder of Eggstack.
AUTHOR BIO
Mike Ballew is a professional engineer and the founder of Eggstack.
TERMS OF USE
Conventional wisdom would have us believe that our living expenses will decrease in retirement, but is that really the case? According to a study by the Employee Benefit Research Institute, half of Americans experience an increase in living expenses when they retire.
By the time you retire, a travelling jones coupled with a bucket list of destinations will have you packing your bags for faraway destinations. With no job and no young children to tie you down, what better time to travel? In addition, there’s the fact that you’re not getting any younger. You have to get out there and enjoy life while you still can.
Contrary to our advice in How to be Happy in Retirement, many people wait until they retire to start thinking about how they’re going to occupy their time. Unless your retirement plans consist of visits to the local library and knitting, there are going to be start-up costs.
For example, suppose you decide to take up woodworking. You will need some power tools and a stockpile of wood and maybe an air conditioner for your garage. There are going to be upfront costs associated with any endeavor you undertake, which is why it’s best to put those costs behind you while you’re still working.
Retirement is a shock to the system. With no steady paycheck it’s not unusual for new retirees to clamp down on discretionary spending. Running out of money is the number one fear among retirees.
Most people experience increased medical costs as they age. Medicare does not cover everything, there are co-pays and other out-of-pocket expenses to contend with. Medicare supplemental insurance can help but it’s not free. Even if you have stellar genes and have lived a perfect life, your medical costs will likely increase in retirement.
One bright spot is the fact that once you retire, you no longer need to save for retirement. That frees up some money.
Ideally you will have paid off your mortgage by the time you retire. You still have to pay property taxes and insurance, but they are significantly less than an entire mortgage payment. Unfortunately, mortgage-free bliss is not the case for many retirees. A study by the Consumer Financial Protection Bureau found that one-third of retirees are still making mortgage payments.
While housing typically consumes the lion’s share of your household budget, transportation runs a close second. This is another expense that should decrease in retirement. With no daily commute, you should experience lower fuel costs and less wear and tear on your vehicles. Consider Downsizing to One Car in Retirement, it can have a favorable effect on your finances.
Life insurance is another area where you can economize in retirement. You are retired so there’s no income to replace. Retirement is the right time to kick term (not whole) life insurance to the curb.
Finally, we end where we began, with travel. As mentioned, travel costs will likely increase when you retire, then taper off over time. When you reach an age where travel feels more like torture than something you enjoy, the vacations will come to an end. A good model for planning purposes is to assume elevated travel expenses for the first ten years of retirement followed by a fairly rapid cessation.
Your living expenses are going to change when you retire, and they are going to keep on changing. That is why it is so important to plan and save for retirement. The best way is to hire a financial advisor or avail yourself to sophisticated computer software that can model changes over time. Programs like Eggstack analyze your finances and provide guidance on how much to save. Modeling software performs a year-by-year simulation to deliver real retirement planning. Don’t rely on free online calculators or leave it to chance, your retirement is too important.
Photo credit: Pixabay
April 19, 2020
