Estimating Your Expenses
Posted by Gail | Filed under Retirement Planning
In order to retire when you want, and to live the way you want during retirement, you have to know just what it will cost to live. The best way to calculate this is to look at your current budget and then project what it will cost when you retire.
Some costs will go down. You’ll likely spend less on clothing and daily transportation, since you’ll no longer need to get to work or look good when you get there. As your children leave home, you’ll find your household expenses declining. You will probably have acquired most of the “big stuff” you need prior to retirement. And with a well-planned financial strategy, you may have eliminated your mortgage. You may also pay tax at a lower rate if your income is reduced.
Some expenses will go up. Premiums on life and health insurance will increase, as will your costs for medication and dental care. And if you plan an active retirement, your travel and entertainment costs may rise.
While you won’t be saving as much anymore… hey, you’re retired now, right?… you’ll still need an emergency fund. The size of your emergency fund will depend on your financial commitments and the amount of income you have regularly flowing in. If it looks like things may be tight during retirement, establish a fairly significant emergency fund before you retire. If you know for certain that you will have more income than you’ll need, your emergency fund can be smaller, and you can keep socking away a little every month to keep it healthy. Also consider the source of your income. A pension that is indexed is more reliable than income from interest-bearing investments, since a decline in interest rates could mean significantly less income.
Most people have heard how inflation eats away at our money. In 1965, a litre of milk cost 33 cents. By 1990, the price of a litre of milk had risen to $1.39 — a 421% increase. The price of a litre of gas went from 9 cents in 1965 to 50 cents in 1990 to $1.45+ in 2008. While no one can predict the rate of inflation over the next 30 years, we know it will be with us. To protect ourselves, we have to plan for it since we’ll have to live on our retirement income for 20 or 30 years.
Okay, so you’ve figure out how much money you’re going to get from the Feds, and how much you’ll get from company pension plans. And you’ve calculated how much you’ll need a month to cover your expenses. If it comes out even, you’re set. If you have a bit of a gap, you’ll have to fill it from your savings.
Hopefully, you’ve been contributing to an RRSP and you have a stash of money you can use to bridge the gap between your federal and corporate pensions and your expenses. Failing that, you may have assets you can sell to give you some breathing room.
As long as you start planning early, you’ll have the time … and therefore the flexibility… to make some moves that’ll put you in a better place during retirement. You can:
Rein in your spending. One way to have more to put aside for retirement is to spend less. Review your current expenses and look for ways to eliminate little costs here and there. You’ll be surprised at the difference it may make. And if you’re close to retirement, practicing to live on less now will stand you in good stead when you’re living on your retirement income.
Boost your earnings. Can you take a second job? Are there ways to increase the money currently coming in? Look around for ways to make a little extra money. This goes hand in hand with . . .
Delay your retirement. The later you retire, the more time you have to save and the more time your money has to grow before you have to start pulling on it. And if you also . . .
Plan to work during retirement, you’ll stretch your retirement savings even further. Do you have an interest or hobby you could turn into a money-maker? Would you consider working part-time in a completely new field? Be creative. Don’t underestimate the value of your skills.
Use your equity. Whether you decide to downsize, sell and rent, or use a reverse mortgage (not my favorite), your home equity is a good source of additional retirement income.
Remember that your retirement savings are made up of both income earned on your savings and also your principal. Does this sound obvious? A lot of people resist drawing on their principal during retirement for fear that they will outlive their money. If necessary, take your figures to a financial adviser who can show you exactly how long your principal will last. And for those of you hell-bent on leaving an estate for your children, that only makes sense if you can do so comfortably. Living like a pauper so you can pass on your money to your kids is dumb! You did it on your own. Now it’s their turn.
That covers the very basics for retirement planning. If you have questions, or there are areas you want me to elaborate on, leave your suggestions in the comments.
BTW: Maureen, go look in the Have Your Say. Someone is trying to meet up with you. Mary wrote to say: “Somewhere on your postings could you please remind folks to keep sending in their food sharing tips and recipes – that would be great!” And I need Success Posts. I have a half dozen left, but they’ll be gone by the end of the month. If you like this section of the site, it’s time to share your story.
May 13, 2009 at 7:35 am
two more things…they seem obvious BUT they are not to everyone..
1.) Do NOT rely solely on your company pension no matter how good it is!
2.) You are never too young to start your own RSP…it’s an affordable option available to anyone over 18…once you are done school and in the work force the first thing you should do before you collect that 1st paycheck is open an RSP and start an automatic contribution to it.
May 13, 2009 at 7:51 am
Ah retirement. That life event that seems so far away and yet, you wake one day and it is here. Most people seem to save and save for it without and never plan how they will live out their retirement. That is a huge mistake. How can you possibly know how much money you will need?
Your lifestyle during your retirement is entirely dependent upon how you age. Your health will affect your retirement. My spouse and I plan to retire when she is 55 and I am 50. We are planning an active retirement until about 70. Why 70? We have looked around at family and friends and most people seem to slow down considerably at 70. That is not to say that we will be checking ourselves into a senior’s home at 70. It is just to say that we accept the inevitable. We are aging and along with it comes certain changes.
We have also agreed that when we retire we are going to sell our expensive city home and move to a smaller, less expensive community. Yup, this means that our financial goals right now are not to maintain our current standard of living into retirement. We have decided and are planning for changing our standard of living when we retire. Smaller house, different community, different goals.
And we have accepted that life changes as we age. We have learned from the experience of others and know that maintaining a house, for example, as we age is a lot of work. So, we have planned to have a house, buy a condo and eventually rent an apartment. Shelter is shelter and neither of us want to sacrifice our standard of living by having huge chunks of money tied up into real estate. Hey, we save for retirement for one reason and one reason only: to spend during retirement. And that is what we will do. Gail was correct when she stated there is no need to live like a pauper so that we can leave money to someone else.
May 13, 2009 at 9:56 am
The difficult part of the calculation are:
- How long will you live?
- How expensive will retirement homes be?
Some retirement homes cost between $2000 and $5000 per month! I can’t afford most on a salary! I find that hard to calculate.
May 13, 2009 at 10:48 am
Thanks for this post, Gail. Over the next couple of years my husband and I are going to live on his paycheque and put my pay into savings. I am sure that we can do this. It will mean we will have to cut down in some areas. Your advise as been so helpful in our lives and because of you we are keeping on the straight and narrow. Everytime I go to buy something Gail is sitting on my shoulder saying to me “need or want” most times it is a want and not a need and I end putting it back on the shelf.
May 13, 2009 at 3:55 pm
Some heavy thinking…. I will need to sit and do the calculations hard and seriously!
There is something else to consider and that is the longetivity of the spouse. Are you depending on their pension? How much is left for survivor’s benefits? Or what if the marriage is a bust after the kids are grown (it happens)!
I for one do NOT want to be a senior living in poverty. Therefore a plan is necessary.
July 2, 2009 at 11:51 am
Hi Gail,
I was hoping to speak to you in regards to completing retirement webinar’s for our company. We were in contact not too long ago about this. Would you mind contacting me.
Thank you
Jennifer
August 2, 2009 at 8:01 am
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