Financial Planning, Wealth & Tax Advisory

A Deep Dive into Retirement Expense Dynamics

For retirees, understanding your spending and budgeting can be tricky.

They often grapple with concerns about their spending habits, questioning if they are depleting their funds too quickly and risking financial insecurity down the road.

It’s a legitimate worry, as some households tend to indulge in higher spending at the outset of retirement only to witness a significant decrease in expenditure over the next 10 to 20 years.  In general, your expenses can be hard to determine without a well-conceived budget.

Budgeting and estimating retirement spending can be challenging and overwhelming for many individuals. Recognizing this, we can start by adopting an approach that assesses what retirees can generally afford based on their preretirement income. If you know your annual income in the last year of employment, you can kickstart the planning process by assuming an expenditure of around 80% of that income annually in retirement—referred to as your retirement income replacement ratio.

For instance, with an estimated preretirement income of $100,000, plan on an annual retirement expenditure of about $80,000.

A financial planner can help you consider the 80% figure as a starting point, and then tailor it to your income, expected lifestyle, and health considerations for a more precise estimate of retirement expenses. As retirees age, spending patterns evolve, experiencing a slight increase around age 55 for early retirees and a notable drop after 65.

Two pivotal cost factors in retirement are housing and healthcare. While housing costs typically decrease over time as retirees downsize, healthcare expenses can vary unpredictably. Fidelity estimates that a retired couple might require $300,000 for healthcare during retirement, underscoring the need to plan for potential above-average expenses.

Lifestyle choices also exert a significant influence on retirement spending, particularly for those with more active pursuits. To align your budget, you might consider increasing the retirement budget by approximately 5 to 10 percentage points for an active lifestyle. This emphasizes the importance of retirees aligning their financial plans with their preferred activities.

Keep in mind that a thoughtful consideration of these factors empowers retirees to plan effectively, ensuring financial stability throughout their retirement years. By understanding evolving spending patterns, accounting for housing and healthcare nuances, and factoring in lifestyle choices, retirees can navigate their financial journey with confidence.

Need assistance creating a retirement budget that is unique to you?  Contact our team at Assured Concepts Group to learn if we may be a good fit to help.