Major Expenses that Happen During Retirement and How to Prepare

What do you need to include in the retirement expenditure budget? This is a daunting question every retiree must ask themselves. The future remains uncertain, and consequently, plans may not be relevant by the time you retire. Employee Benefit Research Institute (EBRI) found that many people do not try to calculate how much they will need in retirement.

Therefore, it is of paramount importance to prepare early. There are several expenses you need to budget for in retirement. The Bureau of labor statistics (BLS) lists the following as the significant annual expenses for older families.

• Housing
• Transportation
• Food
• Pension and social security
• Healthcare
• Entertainment
• Other expenditures – include personal care products, alcohol, tobacco, education, life and personal insurance, reading among others.

Note that old people from the age of 55 to 64 years tend to spend more than older people from the age 65 to 74 years of age.

How to prepare

There are five steps needed to get your retirement plan on track. Additionally, there are unknowns in the retirement plans, but it should not scare you from making one anyway. It is better to be prepared than to be caught off-guard without a working plan in your old age.

1. First of all, consider your current budget

This is the most challenging step in preparation. However with a current budget then its easier to use it for future projections. If you do not have an existing monthly budget, then make one by recording your monthly expenditure.

For variable expenses, like electricity bills, use the average yearly bill by adding up all monthly bills and dividing the total amount by 12 months. For bills requiring payment other than monthly subscription, like auto insurance payment, divide the total amount by 12 to get monthly expenditure.

2. Secondly, establish your likely expenditure in retirement

Write down the expenses you might incur during retirement. Deduct paid off debts. Be as real as possible. You should include fun items like golfing, eating, travel, ballroom dance lessons, and many more. Then, add up these expenses to your monthly bill. Additionally, you need to use projected spending to calculate estimated expenditure during retirement.

In projected spending, multiply your current income with a certain percentage to give you the retirement needs. However, it is not accurate, but it gives you a rough estimate of your needs during retirement.

Moreover, you should also consider the 80 percent rule which states that you should have a plan of replacing 80 percent of your current income in retirement. You can be more conservative by using the 90 percent rule or 70 percent rule if you feel won’t spend as much.

Further, with your retirement money stashed away you can use the four percent rule which states that you can withdraw four percent of your saving yearly without running it dry.

Finally,
3. Evaluate your retirement planning progress – by instituting benchmarks.
4. Once you decide what to do, Create your plan and make changes if necessary.
5. Revisit your plan often, like yearly, by monitoring your finances.

Big Myths Surrounding Why People Don’t Plan for Retirement

Ask anyone about their retirement accounts and they’ll have one of two things to say. They’ll either tell you they’re working hard and saving as much as they can so they can retire early and well, or they’ll begin issuing excuse after excuse about why they’re not saving, can’t save, or definitely will focus on saving later. Retirement is a big deal, unless you’re not saving and can’t do it. Before you start judging those who aren’t saving, take a look at the biggest myths surrounding the lack of retirement planning in the United States.

Myth: People Can’t Afford to Save
Fact: People Choose Not to Save

It’s easy to say you can’t afford to save for retirement. It’s suggested you save at least 10% of your income for retirement. If you make $50,000 annually, that’s $5,000 per year. If you’re paid 26 times per year, you save just over $192.00 every paycheck. It might seem like a lot to someone who only makes $50,000 per year until you break that down. That’s just over $96 per week, or $13.70 per day. You probably spend that in coffee and lunches. People can afford to save for retirement, but they don’t because they focus on other things first.

Myth: Only Wealthy People Save for Retirement
Fact: Only Half of Wealthy People Save

In this situation, wealthy is anyone who brings in more than $50,000 per year. This is considered average income in the United States right now, and only half of the people who make more than this are saving and planning for retirement. The rest are ignoring it completely. It’s true that fewer people belonging to low-income families are saving, but those who make more also aren’t saving.

Myth: Young People Don’t Save
Fact: Young People Do Save

It’s easy to fall into the trap of believing it’s young people with the mentality that they can worry about saving tomorrow and have fun today who aren’t saving. It’s true many young people aren’t saving for retirement, but almost half of people who are close to retirement age haven’t saved yet or didn’t start saving early enough to allow them to retire well. Retirement planning isn’t just ignored by the young.

As the age for retirement gets higher and higher as the years pass, it’s more and more difficult for people to retire with the kind of money they need to live comfortably. Many seniors are on a tight fixed income unable to afford to live, and it’s devastating. Saving for retirement is crucial, and it’s time everyone starts doing it.

Tips For Retiring Early

As Market Watch calls it, retirement just means being financially independent. Many people live decades reminiscing about a day that they won’t have to work so hard to pay their bills. Many can’t wait to retire so that they can start living. As the living costs grow, so does the retirement age, but here are some tips to help you reach your goal of financial freedom.

1. Understand Numbers
The first thing to do when you want to retire early, is understand how much money you’ll be able to live off. Typically, if you’re retiring, all of your bills and mortgages are paid off. You’ll have to calculate your monthly living and emergency expenses and figure out how much money you can actually live off while saving the rest of your income in long-term investments such as 401k or Roth IRA. One couple saved $1 million dollars in four years to retire at age 43.

2. Spend Less, Save More
It seems simple enough, but the key to having money in the bank is to spend less and save more. A majority of Americans spend money left and right on things that they don’t actually need, but want. For example, Americans spend half their food budget on eating out at restaurants. Groceries have also gone up in price over the years, and retail has been booming. In March 2010, families spent over $500 a month on shopping alone. The key point is that Americans are spending their income on unnecessary things rather than investing their money for saving. The best ways to save money is to be thrifty, including groceries are much cheaper (and healthier) at your local farmer’s market. Stores such as Aldi and Trader Joe’s are also great for saving money on food because they have healthy choices at the lowest prices they can sell at. Starting with changing your household spending is a great way to begin your early retirement process.

3. Invest
You don’t have to have a finance degree in order to invest your money. For one, every person who works full-time should have some sort of savings plan, whether through a Roth IRA or 401K. Another popular form of investment is housing. Owning a house will allow you to raise equity, but also have a backup plan in case of emergencies. As long as your mortgage is paid off, you can always sell your investment and get the cash for it, especially because housing typically goes up in price value. This is the easiest form of investment.

4. Income
It’s a good idea to have multiple sources of income for your early retirement.The current prediction is that most of us will never see a social security income, and if we do, we won’t be able to receive it until at least age 65. One typical way of creating income is owning a home. As the price value goes up, so will your equity. As mentioned this will allow you to sell your home, but other people choose the route of residential rentals for consistent income. The truth is that many places in the United States don’t have enough housing available, therefore there will always be a need for housing rentals. Another source of income would be starting a side business. Many people find ways to make money off their hobbies, such as landscaping, art, or sales.

5. Understand Your Values
Saving enough money for a retirement can be a lot easier than most people think: the hard part is changing your lifestyle. If you want to retire early in your life, it’s crucial to create a plan that you can stick to. This does mean becoming frugal with your lifestyle choices and decisions, but you will soon be able to realize what your life values are. When you learn how to live a simple life, you’re able to understand the difference between your wants and needs, and can see a different perspective when it comes to your financial choices.