How to Estimate Your Retirement Expenses

Retirement is almost as inevitable as death and taxes. Even if you love your career, someday you’ll almost certainly retire – or take on a form of semi-retirement.

This is why estimating your retirement expenses is so important. Understanding what you can live on when you’re retired can mean the difference between retiring too early and being broke – and retiring at an ideal time and being financially stable. But knowing you need to estimate your retirement expenses and knowing how to do it are two different things entirely. There’s no one right way to calculate how much money you’re going to spend during your retirement, but as you crunch those numbers, you’ll want to keep several strategies in mind.

Estimate high. Along with what expenses you think you’ll need to spend, you’ll be better off trying to save enough so that there isn’t a major difference in your spending when you go from working to retirement, says Tom Chandler, a financial advisor with Ameriprise Financial in Roseville, California. In other words, don’t plan on spending far less than you do now.

Chandler, who has been doing this for over 25 years, says, “I can tell you emphatically that most people I come across hate to budget their expenses.”

So Chandler suggests taking your current take-home pay and deducting expenses that you aren’t likely to pay during your retirement. For instance, if you have a mortgage payment now but you won’t during retirement, remove that from your list of expenses. Maybe you also pay to park your car at work? And you commute every day, and so your car’s gas expenses will be lower? Get rid of those.

Whatever bills and expenses are left over is a ballpark figure on your monthly expenses during retirement, unless you plan on downsizing considerably.

“I’ve found most people want to maintain their same standard of living, and this gives them a quick way to estimate what they might need for spending,” Chandler says.

He adds, “Of course, to be more accurate, you will have to prepare a budget.” But he suggests being brutally honest and planning a budget that isn’t sparse, but is one that includes what you’re likely going to actually spend.

So if you love your daily iced coffee or football season tickets, put those in your budget. If you plan on traveling or taking up a new hobby, you’ll want to include those projections as well. If you have to take them out later, then you have to take them out.

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