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Financial Tip

Financial Tip
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

How Much Income Will You Need in Retirement?

How Much Income Will You Need in Retirement?

Most people who envision a financially secure retirement share one common goal – to generate a lifetime of income that will keep pace with inflation and the rising costs retirement, including health care and long-term care. To achieve that goal, it is important to know how much you will be spending in retirement. According to the Bureau of Labor Statistics, the average retiree household spends $45,756 a year – about $3,800 a month. What you might spend will depend on a number of different factors, including your lifestyle and where you live.

Estimating Your Retirement Expenses

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As with your pre-retirement years, you will have expenses in retirement that are necessary and fixed, as well as discretionary expenses over which you will have more control. To better plan for the income you will need in the future, you should come up with an approximate figure on both your basic living expenses, as well as the additional costs you will have such as travel and leisure.

Living Expenses & Other Necessary Costs

In the Living Expenses category, you will have several types of expenses. There may be some flexibility with these but, for the most part, many of your basic living expenses in this area will be necessary, and oftentimes a fixed amount.

Living Expenses: Your living expenses in retirement include how and where you want to maintain your lifestyle. For example, where you choose to live and the size of your house. That will dictate to a large degree your housing, utilities, food, and transportation expenses.

 Debts: If you are still making payments on outstanding debts, such as a mortgage or credit card balances, you need to add these amounts into your overall expenses.

Medical / Healthcare: According to Fidelity Benefits Consulting, a 65-year-old couple retiring this year will face an average of $280,000 in medical expenses throughout retirement. If you don’t have sufficient funds set aside to cover this amount, the expenses will need to be covered with your income.

Insurance: Remember to include insurance premiums in your expenses too. This includes Medicare or health insurance, as well as auto insurance, home insurance, and other coverage that you need to carry.

Taxes: While your income taxes may decrease when you retire, you may still have to account for other types of taxes such as property taxes, depending on where you live.

Discretionary Expenses

After you have estimated your fixed living expenses, you need to determine how much you will need for discretionary costs. Generally, you will have more control over these types of expenses, so they should be easier to manage. If you plan well ahead of time, you may have much more room for these items in your retirement lifestyle.

Travel: Many people look forward to traveling in retirement. This travel may include local getaways or taking trips they have planned and dreamed about for many years.

Family: Spending time with family is another key benefit of retirement - but it can oftentimes require ample funds for doing so. Therefore, budgeting for various outings and events will be important.

Hobbies: Retirement is also a time many people can finally take up a hobby they’ve wanted to try for years - or to revisit one they haven’t had time for. Some hobbies can be expensive, so they need to be included in your spending plan.

Charity: Many retirees make a point to regularly donate to a favorite charity. If this is the case with you, be sure to allocate a certain amount of funds for this in your budget.

Other: Many retirees may just want to relax and enjoy a latte each day. Yet, even that will take funds. Whatever your vision may be, you want to ensure that you have the money to pay for it - and now is the time to plan.

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