If you’re doing retirement planning, you’ll probably get to the step where you need to estimate your retirement expenses versus your retirement income.
I complete this step all the time with prospective clients in our initial meeting and so I’ve learned the best way to do it without overwhelming them.
It might be tempting to break out the spreadsheet, start a Quicken subscription, or build a detailed budget. But there’s a simpler way to get started at the beginning.
Conceptually it works this way… We spend everything that we don’t save. I know… It’s profound. But it really does work. These are the steps I take.
Begin with take-home pay for the year. Take-home pay already reflects the reduction due to taxes, contributions to retirement savings, and payroll deductions. Unless your systematically saving a portion of your take-home pay, consider that as the starting point of your retirement expenses (if you do save, subtract this savings from the total).
I say “starting point” because we’ve got to make some additions and we’ve got to make some subtractions in order for it to be accurate.
What we generally need to add is medical premiums in retirement. Most receive their healthcare by payroll deduction in so when leaving work, one needs to estimate the amount of medical premiums via Medicare and any difference in out-of-pocket costs. Talk with a Medicare expert in your area to determine how much of these will be for your situation.
You may also need to add any new expenses that will begin in retirement. These may be things that used to be covered through work, new hobbies, additional travel, etc.
In regard to subtractions, retirement life may mean less expenses in certain areas which you can account for. It may deal with wardrobe, commuting, paying off debt/mortgage, or elimination of life insurance premiums.
Don’t get too hung up on 100% accuracy… Shoot for 80% accuracy. You can always monitor your ongoing expenses throughout the year.
Remember that you are trying to create a retirement plan that brings in predictable or guaranteed income to cover your regular retirement expenses plus a little bit more to replenish your reserves each year. Taking a little bit of extra time at the beginning of your retirement planning to refine with these are will go a long way toward creating a blueprint that will give you more peace of mind.
How did you are will you estimate your retirement expenses?
Contact me and let me know
