Making the transition from the workforce into retirement is a very turbulent time in one’s life. This is due to the financial uncertainty that retirement, and life in general, can bring. It’s imperative that you consider and estimate your expenses during retirement, this will ensure that you are properly prepared for life after employment.
The General Rule of Thumb
A simple way to calculate your expenses during retirement is to use the 70% rule. This basic rule states that many retirees will only spend about 70% of their pre-retirement expenses. This method in estimating retirement expenses assumes that you will have 30% less expenses during retirement.
This method is supported by the fact that during retirement you will no longer need to buy new work clothes and dry clean them. In addition, during retirement you will most likely commute less; buying less fuel and vehicle maintenance. These are only a few, yet great, examples of expenses that you could reduce or cut during retirement.
The Bottoms Up Approach
In order to calculate your retirement expense accurately, I suggest using the bottoms up estimation method. In order to accomplish this you will need a few pieces of financial data. I recommend taking a few minutes and grabbing a few months of bank statements, credit card balances, and any other financial data you might have.
Once you have all of your financial data, begin to add up all of your monthly expenses. You can find an example of how to do this in my post on organizing financial planning data. To help make decisions during the analysis part of your retirement plan, I suggest organizing your expenses by fixed (food, mortgage, car payment, etc.) and variable costs (entertainment, luxury items, Starbucks, etc.)
Once you have a total for your monthly expenses, you might find a few that you can eliminate or reduce. This is an important step in the retirement planning process, as sometimes we do not have enough income to maintain our current lifestyle during retirement.
Adjusting Retirement Expense Data
Keep in mind that despite the expenses that you can reduce or eliminate, there are other expense that will probably continue to grow. In example, of some expenses that you should expect to increase in the future is your health care and insurance costs.
In addition to growing expenses, its also important to use conservative assumptions as to how long you will be in retirement. Retirees run out of money more often than many realize. When determining how large your nest egg should be before you make the leap into retirement, ensure that your savings/ income will last until you and your spouse are around 95-100 years old.
As you can see there are a few different approaches to estimating your expenses during retirement. As with any endeavor, the more effort you put into it, the more you will get out of it. The assumptions you use in your retirement plan are as critical as the data and calculations that you use. When estimating retirement expenses be conservative, it could really pay off one day.