How Much Will You Spend in Retirement?

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How Much Will You Spend in Retirement?

Tips for estimating your expenses after you stop working

Planning for retirement means making a lot of educated assumptions—where you will live, how much income you will generate (based partly on how your investments will perform) and how long you will live. One of the most important assumptions, though, is how much you will spend in retirement—as that determines how much income you’ll need each month or each year.

A recent survey by the Employee Benefit Research Institute found that only one-third of current retirees are very confident in their ability to live comfortably in retirement. In other words, two-thirds underestimated how much money they would need.

Interestingly, the Bureau of Labor Statistics (BLS) found that average annual spending in 2016 by households headed by someone age 65 was $45,756—or about $3,800 per month. But that’s just an average, and so many variables affect spending habits.

So how can you make a better educated assumption of your personal retirement spending needs? Here are some guidelines:

First, know how much you spend now.

You can get a clearer forecast of your retirement spending by taking inventory of your current spending habits—because it’s likely that at least some of those will continue into the future. So, make a list of everything you spend money on, from your home and auto payments, taxes, insurance and utility bills to more discretionary purchases like restaurant meals and travel.

Once you have your full list, you can begin to estimate how those expenses will change after you retire. For example, you might be on track to pay off your mortgage before retirement, so you will no longer have that monthly bill. But you will still have to pay property taxes and insurance on your home—which you might estimate will climb 5 percent annually. (That means you will have to budget more each year for property taxes and insurance throughout retirement.)

Consider your retirement lifestyle goals

Beyond things you currently spend money on, you will likely be devoting some of your newfound free time in retirement to new activities—some that may cost extra money. For example, if you plan to travel extensively or buy or rent a second home, you will need to estimate the cost of those activities and factor them into your spending forecast.

Understand common retirement spending patterns

One challenge with estimating retirement spending is that it tends to fluctuate over the course of retirement. Research has shown that people on average spend more in the early years of retirement than they do later on. The BLS, for example, found that average 2016 spending for a household led by a 65-to-74-year-old is $50,873. But that fell to $38,691 for households run by someone age 75 or older.

Be realistic about health care spending

Health care could become a much bigger line item in your budget as you age. So, it’s worth trying to get a rough estimate of how much you’ll spend on it. Consider what your health care expenses will likely be. For one, you’ll need to pay for Medicare and any supplemental health insurance coverage you get. You’ll also have the cost of any prescription drugs.

One analysis found that a 65-year-old couple today needs an average of $280,000 saved up for health care. And that amount doesn’t even include the potential cost of needing long-term care either at home or in a private nursing facility.

It’s a good idea to start thinking about your retirement expenses long in advance, because it will play a direct role in how much you will need to save. BOK Financial Advisors can guide you through the key considerations when planning for retirement, including forecasting your expenses and building a saving and investing strategy.


Prepared by WSJ Custom Studios.

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