Budgeting for Retirement & Potential Legal Implications
While some sources will tell you that you will spend nearly as much when you retire as you do now, this is not necessarily true. Many people can enjoy a comfortable retirement while spending half to two-thirds as much as they did previously. You should calculate your budget for retirement in advance to give yourself a sense of how you should plan. This involves calculating your current expenses and then subtracting any expenses that will not continue into retirement, as well as adding new expenses that may arise.
Calculating your current expenses should be straightforward. You can consult your income tax return from the previous year to find the income that you received after taxes. If you helped out your children or other family members financially, or if you added some of your income to a savings account, you can subtract those amounts. (You do not need to subtract your contributions to a retirement plan, since those will have been subtracted already.) The remaining amount will give you a general sense of how much you spend in an average year before retirement.
Subtracting Expenses Before Retirement
Some of the most significant expenses in your current budget may not continue into retirement. You may have finished paying off your mortgage by the time that you retire, and you may no longer need to pay for education, food, and clothing for your children. If you no longer work, you will not need to budget for expensive work clothes, and you will not need to account for expenses related to commuting to work. Your income taxes also will drop because your income will drop. As far as recreational activities, you may be able to get discounts for many forms of entertainment and travel. Being able to travel outside peak seasons may reduce your recreational costs as well.
After retirement, some people find that they no longer need a large house. They may move to an apartment or condominium instead. Also, people who have a vacation home during their career may retire to that place and thus no longer need to maintain multiple homes. In addition to cutting down on maintenance costs, this will reduce the property taxes and insurance that you need to pay.
Adding Expenses After Retirement
You should be aware that you may accumulate additional expenses or increased expenses in certain areas after you retire. The most obvious example is health care costs, which tend to climb as people get older. You will have Medicare coverage once you turn 65, but you may need to buy your own insurance policy to cover any gaps. Any costs for medicines, doctor’s appointments, medical care, and nursing care (whether at home or in a facility) can put a substantial dent into your budget.
If you plan to travel more frequently and for longer periods than you did during your career, the point above about reduced travel costs may not apply. Also, your expenses for children may not drop off significantly if you still have children living with you, as is increasingly common, or if you have a child with a disability. Even if a child no longer lives with you, you may want to make sure that you are able to help them if they fall into financial difficulties.
