One of the toughest parts about planning for retirement is that you can't be sure in advance how much money you'll really need to have saved for it. So you'll often hear that it's a smart idea to draft a retirement budget well ahead of time that you can use to guide yourself to a retirement savings target number. Depending on how you plan to spend your golden years, that might mean aiming for a nest egg of $500,000, $1 million, or more.
Of course, even estimating those future expenses isn't always easy. You may not have a sense of what things will cost in the future because we can't know what inflation will look like -- and price changes impact different goods and services differently. You can't know exactly what your specific costs will entail because your expenses will almost certainly be somewhat different for you as a retiree than they were for you as a worker.
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A recent Edward Jones survey found that 39% of retirees had trouble figuring out a budget for their senior years. And 48% of pre-retirees who responded cited figuring out a retirement budget as a top challenge. But if you're able to get a handle on just these three expenses, it might make the whole process of budgeting for retirement easier.
1. Housing
Once you stop working, you'll need a place to live. That goes without saying. So think about the sort of home you see yourself living in.
If you think you'll remain in your current home and that your mortgage will be paid off in time for retirement, you should be able to reasonably estimate your future housing costs based on what your property taxes and maintenance expenses look like. If you think you'll downsize, you can plan to slash those costs accordingly. If you expect you'll relocate to a part of the country where housing tends to be cheaper, now's a good time to do some research and get a sense of what costs you might be looking at.
Housing could end up being your largest expense in retirement. Narrowing down just how large it will be could make it easier to craft a budget that's actually viable.
2. Healthcare
The amount of money you'll end up spending on healthcare in retirement will hinge on different factors. These include which Medicare plans you sign up for and the state of your health specifically.
However, it might help you know that according to Fidelity, the average 65-year-old couple who retired in 2022 is expected to spend $315,000 on healthcare costs over the course of their retirements. If you're planning to retire at a similar age and have average health, that's a number you may want to incorporate into your budget as a starting point. And if your health isn't so great, or your family history suggests that it won't be, pad that number accordingly.
3. Activities to stay busy
Working is a really inexpensive way to occupy your time. Once you retire, you'll need something else to fill your days. And many of the things people tend to pick are apt to cost you something.
So give some thought now to what you'll want to do with your time. Will you spend more of it volunteering and staying close to home? Or does your ideal retirement involve more expensive activities like travel? And if so, how much? Determining what your schedule will look like could help you budget appropriately.
Budgeting for retirement is no easy feat, especially when that period of your life is still a fair number of years away. But if you do your best to narrow down what your housing and healthcare costs will be, as well as the cost of keeping busy, you can at least get close to an accurate set of numbers you can use to guide your long-term financial planning.
