When you retire, your spending budget won’t be the same.
The good news is some expenses will be eliminated or reduced; but others will remain the same … or even increase.
According to Savant Capital Management, there are three ways spending changes in retirement.
In retirement, the 6.2% FICA Social Security tax withheld from employees payroll along with the 1.45% Medicare tax become things of the past. Instead of saving for retirement, it is time to start enjoying your golden years and spending your savings.
“During the working years [you] are putting money towards retirement savings. This will no longer be needed once [you] retire as [you] will be relying on [your] nest egg to provide a paycheck,” said Daryl Dagit, a financial advisor with Savant Capital Management.
Transportation and housing costs can be greatly reduced in retirement. The wear and tear on the family car is much less in the absence of your daily commute to the office.
“You will find a vehicle will last much longer in retirement unless you are traveling a lot,” Dagit says. “We find we can budget for a new vehicle every 7 to 10 years, versus needing to be replaced sooner.”
If you have paid off your mortgage by the time you retire, your living expenses will be greatly reduced. If you have a few years to go before it is paid off Dagit says, “when doing financial planning we will factor in the payment until it would be paid off and then only factor in taxes and insurance in the overall expenses of the financial plan.”
Travel and entertainment might top the list for increased expenses in retirement, but after a lifetime of working and planning for this chapter in your life it is time for the party to begin.
“We find some will want to travel for 10 to 20 years once retired and will then begin to slow down on their travel or will cut back from overseas trips to trips within the U.S.,” says Dagit. “We normally budget for these over that time frame and can build in some extra special trips to celebrate milestones in their life.”
As far as entertaining goes, “we do see this increase at first as a newly retired individual tries to find out what to do with all their new found time. I normally find most will fall back into a routine and often say they do not know how they were able to work as they have so much going on.”
For healthy boomers, health-care costs may be less than when you were working. But if you are not in good health, these costs can be enough to wipe out your nest egg.
“What we do find is long-term care costs will average about $2,000 per year, per person -- and there is a strong likelihood that you may need some sort of assistance in your lifetime. This is an extra cost that needs to be addressed as you can self-pay, buy insurance or spend down your assets and go on Medicaid, and let the government make the decisions on where you may stay and what level of care you receive,” says Dagit.
If you are looking for ways to spend down your savings, gifts and charitable donations may be an option to consider.
“Occasionally I will have clients that will open a charitable trust and front load it for charity to offset taxes from large pay-outs at retirement. With the tax changes from 2013, each individual can accumulate up to $5.43 million and gift it at death or while they are living. Not many clients need to worry about gifting during their life time to keep under this number,” says Dagit.