Retirement planning would be a lot easier if we could count on our annual expenses to remain the same. But that's not how it works. Our lifestyle changes a lot as we transition into retirement and it continues to change as we age and life slows down. Anticipating these shifts is key to successfully budgeting.
While everyone's retirement lifestyle looks a little different, here are three common changes most people can expect after they leave the workforce.
1. Your budget might be tighter
Unless you plan to work part time, you have to get comfortable with the idea that all the money you have to live on is what's in your bank and retirement accounts. This can make unplanned expenses more difficult to handle.
You can't spontaneously decide to take a round-the-world vacation if you hadn't planned for it before retirement. And even smaller things, like splurging on a new hobby, can drain your limited funds more quickly than you expected.
That's why it's important to be as meticulous in your retirement planning as you can be. Try to anticipate all potential costs that could arise, and leave a little cushion as well for emergencies. It's up to you to decide what you feel comfortable with, but stashing away a year or two of living expenses for unexpected costs is probably a good idea.
2. Some of your expenses might shrink or disappear
Surviving on less money than you're used to might not be as bad as you think because some of your expenses will go down or disappear in retirement. You won't have to save for retirement anymore once you're already there, and you probably won't have to pay for child care.
You might also save on commuting costs and business clothing. Not to mention, you might be able to score some senior discounts on everyday expenses, like insurance or dining out. All of this can help stretch your dollars.
When thinking about your retirement budget, it might not be possible to anticipate every savings, just like you can't anticipate every cost. But consider the major shifts to your budget, like no more child care, and don't forget to account for them when evaluating how much you'll spend annually.
3. Other expenses might rise
It's normal to see other expenses, like healthcare, rise as we age. Older adults tend to experience more health issues than younger ones, and though most of them have Medicare, this still has premiums, deductibles, and co-pays. There's also a lot that Medicare doesn't cover, like dental care and hearing aids.
Seniors must plan for these out-of-pocket costs, either by setting aside money in a retirement or health savings account (HSA) or purchasing supplemental insurance coverage to pay for what Medicare doesn't. Supplemental insurance will also bring extra costs, but they'll be more predictable than paying for everything Medicare doesn't cover out of your own pocket.
On a lighter note, you might also be spending more money on travel or hobbies compared to what you're spending now. Think about what you'd like to do in retirement and any associated costs. Then, make sure you're including these costs in your retirement plan.
Once you have a general idea of how your spending will shift over time, you should be able to anticipate how much you need to save. If your goals or retirement timeline ever shift, you may have to repeat this process. It's best to do this as soon as you know something's changed. Putting it off increases the likelihood that you won't do it at all, and then you could run short in retirement.