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Do you Know What You’ll be Spending in Retirement?

Saving for retirement is a laudable goal. But it can be a pretty nebulous concept.

While we know all of the smart ways you can build a tax-advantaged retirement nest egg, we’re never fully sure how much is enough. As financial planners, we can only assess your portfolios, income streams, and other factors that deliver a high probability of success in meeting your goals. (On a related note, please see my April 2018 article about “the 4% rule).

Chances are, just how much you’ll be spending in retirement is more than you suspect.

A recent survey conducted by the Wall Street Journal found that most people predict they will cut their spending by 30% once in retirement. Many cited that figure because, well, that’s what they’ve always been told. As it turns out, many people spend more in retirement, not less.

One thing many overlook is that many expenses that used to be covered by your employer, such as travel, coffee, insurance premiums, happy hour drinks, etc. are no longer freebies.

Also many retirees are no longer sitting at a desk all day, and with more free time on their hands, they are more tempted to shop online, increase their travel, support charities, etc.

That makes this a good time to think about what type of retirement you want. High-end travel and dining, a shiny new car, a vacation home. These are all the kinds of things you’ll need to save for now, if you want to enjoy them once you are no longer working.

It may be helpful to sit down with a clean sheet of paper and think about the major expenses you’ll encounter. These can be broken down into: basic needs (utilities, housing, healthcare); discretionary spending (charity, clothes, gardening supplies, clothing, etc.); your digital life (cable TV, mobile phones, online courses, etc.); travel (both regional and global); and entertainment (museums, concerts, books, etc.).

The real goal here is to avoid creating a retirement where you need to skimp on all of these things and live austerely. And you should live well while still having enough money set aside for the greatest unknown retirement variable: healthcare.

A recent study by Fidelity Investments found that the average 65-year-old couple will need to set aside an average of $280,000. This covers health care costs in retirement such as Medicare Part B and Part D premiums, and additional out-of-pocket costs. Buying Medigap supplemental insurance plan may offset this risk.

And that $280,000 is likely a floor. After all, back in 2014, Fidelity estimated that such out-of-pocket costs would be $220,000.

As I advise my clients, these issues should be explored well ahead of your actual retirement. Proper planning is the way to avoid nasty surprises later in life.