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What will retirement cost me?

Written on September 5, 2011 at 7:20 am, by admin

A lot of women wonder “What will retirement cost me?” In order to figure out, you need to sit down and crunch some numbers.

First, start with the basics. How much does it currently cost you to run your household? The bare essentials – mortgage/rent, utilities, insurance, taxes, car/house maintenance, food & essential clothes/personal hygiene items?

Write these down, but understand that these costs will probably be reduced in retirement. For example, your mortgage may be paid and your kids have left the nest. You may able to go from two cars to one so your insurance, maintenance and gas costs will decrease. Estimate your current expenses and take out the costs you expect will be reduced or eliminated. This is the approximate amount in today’s dollars you must have coming in retirement income. You might have to add medical and dental expenditures that are no longer covered by your employer though.

Let’s look at an example:

Sue and Jim, ages 49 and 51

Necessities budget pre-retirement

• Mortgage $2,000 month
• Utilities $ 200
• Insurance (2 cars and home insurance)  $ 500
• Maintenance (cars/home) $300
• Food $800
• Personal clothes & hygiene (2 kids and 2 adults) $500

Total $4,300 a month

They plan to retire in 14 years when Jim is 65 and Sue is 63

Necessities budget retirement

• Mortgage $0
• Utilities $ 200
• Insurance (1 cars and home insurance)  $ 300
• Maintenance (cars/home) $150
• Food $400
• Personal clothes & hygiene (2 adults) $200
• Medical/dental $200

Total $1,450 a month in today’s dollars

So in today’s dollars, Sue and Jim may need approximately $1,450 a month to pay the basic overhead costs in retirement. This would be just short of $2,200 in 14 years’ time assuming your basic costs go up 3% a year. Compare that to what you know you will have coming in from pension income. Any shortfalls between these two numbers will need to be covered by your savings.

Now add on non-essential everyday costs such as gifts, donations, subscriptions etc.  Let’s assume that is another $400 a month. So to cover the necessities and incidentals, Jim & Sue need about $1,850 a month in incoming income in today’s dollars, or $2,716 in 14 years’ time when they retire.

Once you have the basics covered then you need to spend some time contemplating what you would like to do with your time. We are living longer and retirement now extends upwards of 20 to 30 years. How will you fill your days?

Consider what’s important to you. The options are wide open.

You could:

Leaving the high stress career as soon as it’s financially viable.

Change your pace of life.

Spend more time with the family, kids, grand kids and your spouse.

Take up a hobby or learn a new craft.

Improve your health.

Sell the home, down size and maybe even start traveling.

Work part-time or volunteer.

If you were to retire today what would you most like to be doing? Make a list, a ‘retirement bucket list’ and start pricing each activity in today’s dollars.

For example, if my health is good I would like to travel once a year for a month to some location outside of North America. So what on average would it cost you to do this in today’s dollars? Maybe start pricing out air fare, hotels and other related costs.  If on average it would cost you $10,000 a year and your estimate you would travel for the first 5 years of your retirement then you need approximately $50,000 in todays dollars to fund this. Use a ‘future values’ calculator to determine what amount you will need when you retire http://www.calculatorsoup.com/calculators/financial/future-value.php

Jim & Sue’s retirement bucket list

• Jim golf twice a week $400 month
• Sue babysit grandkids 3 times a week – zero cost
• Jim & Sue volunteer at the local animal shelter once a week – zero cost
• Sue to get more involved in jewelry making  $300 month
• Go away one weekend a month to some nearby town $500
• Jim & Sue go to gym 3 times a week- $100 membership
• Dine out once a week at a nice restaurant $150 month
• Misc spending $500

Monthly they need an extra $1,950 in today’s dollars or just shy of $2,900 when they enter into retirement.

So to cover the necessities, incidentals and their ‘retirement bucket list’, Jim & Sue need after tax about $3,800 in today’s dollars or $5,600 in 14 years’ time to fully fund their retirement. Any shortfalls will have to come from savings or other means (i.e.: selling the home and buying a condo to invest the difference to fund shortfall or aggressively saving for the next 14 years).

Speak with your financial advisor to determine how much you need in retirement and how much you must start saving today.

Photo Credit – Wanderlinse