You may have some ideas about what your ideal retirement life would be like. But have you thought about what it might cost? Creating a retirement budget sooner instead of later, is a big part of helping your goals become reality. Once you identify your retirement expenses, you can calculate what your retirement nest egg may need to be and then create an investing strategy to help you reach that goal.
It’s a worthwhile thing to do, especially when you consider that a 2019 Bureau of Labor Statistics study found that the average annual cost of basic living expenses among Americans age 65 and older is $28,751, or nearly $2,400 per month.1 A similar study from the same group found that American households, on average, spent about $5,253 a month.2
So what does your retirement budget look like? Here are some ways to help identify potential costs in retirement and to help prepare for covering those costs.
You may want to start with this retirement budget chart (or your favorite budgeting app) and fill in the numbers as you review the information below.
Essential expenses in retirement
Basic living expenses represent the minimum income you need to cover necessary monthly and annual bills: food, utilities, shelter (including mortgage, property taxes, and insurance) and transportation (including loan payments, insurance, and maintenance).
Your total will vary depending on factors such as where you’ll live whether you plan to downsize, and whether you’ll still have a mortgage or car loan when you retire.
Don’t forget to account for any costs an employer covers now that you will have to take over in retirement. This might be a stipend for cell phone costs or membership dues in an industry association.
A big part of budgeting for essential expenses in retirement is covering health care costs, including long-term care. The numbers can be daunting. Consider:
- A report from HealthView Services projects that a couple could need in excess of $300,000 to cover Medicare premiums, supplemental insurance, dental insurance and out-of-pocket costs for a retirement lasting 22-24 years.3
- People who are turning 65 today have a 70% chance of needing long-term care at some point in retirement, with 20% requiring it for more than five years.4 The cost? An average of $7,695 per month for a private room in a nursing home.5
Though there isn’t a one-size-fits-all formula for determining health care costs in retirement it makes sense to anticipate and factor in an estimated amount as part of your retirement budget. In addition, long-term care insurance could help to offset some of those expenses, as could maintaining a healthy lifestyle.
Major milestones that could happen after you retire should also be considered. They could include:
Paying for the wedding(s) of your children or grandchildren. In 2019, the average cost of a wedding was $33,900 (including the engagement ring, ceremony, and reception), according to The Knot.6
Covering the cost of college for your children or grandchildren. Though tuition and fees vary, the cost of an average private institution was $35,087 for the 2020-21 school year.7
A major home improvement project. This can include things like creating an attached suite to bring an aging parent to live in your household. Though it depends on factors such as room sizes and type of materials, home renovations and remodels average $46,729, according to HomeAdvisor.8
Discretionary expenses (the fun stuff)
Once you’ve accounted for your basic living expenses including health care costs, consider all the fun things you want to do in retirement. It could be checking off some bucket-list items related to travel, splurging on a hobby, volunteering somewhere, or visiting long-distance relatives more often. Estimate the costs related to these activities and include those in your budget.
Steps to take now
Once you’re armed with a good estimate of your costs, you can calculate how much you may need to save for your retirement. Gather your notes and speak with your financial advisor about your unique vision for retirement. You can work together to map out a plan to help you make that vision a reality.
1 “Consumer Expenditure Survey,” Bureau of Labor Statistics, 2019.
2 “Consumer Expenditures,” Bureau of Labor Statistics, Sept. 9, 2020.
3 “Why Health Needs to be Part of Retirement Planning,” HealthView Services, July 2019.
4 “How Much Care Will You Need?” LongTermCare.gov, Oct. 15, 2020.
5 “Costs of Care,” LongTermCare.gov, Oct. 15, 2020.
6 “New Decade Ushers in New Era of Couples Planning Their Weddings,” Business Wire, Feb. 13, 2020.
7 “See the Average College Tuition in 2020-2021,” U.S. News & World Report, Sept. 14, 2020.
8 “How Much Does It Cost To Remodel Or Renovate A House?” HomeAdvisor, 2020.