Ups and Downs of Retirement Expenses: What Do You Need?

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We loathe calculators in our household -- because we only use them when we have to figure out what large sum of money we need to save to accomplish a goal. And when we recently decided to calculate how much we'd need to save for retirement, we thought our trusty electronic device was broken when it spit out a seven-digit number. We ran the numbers a second time and sure enough, the result still topped $1 million.

After collecting ourselves and analyzing the numbers a little more closely, reality began to set in. Living for 25 years with only your only outside income being a small stipend from Social Security requires a huge chunk of savings.

When it comes to understanding why retirement is so costly, my husband and I like to think of it this way: How much money do we need to get by in a month? Then we take that number and multiply it by 12, which is how much we'll need over a year. Finally, we multiply that number by 25 (supposing our retirement lasts from age 65 to age 90), and that's roughly how much we'll need for retirement -- without factoring in inflation on the one hand, or investment growth on the other.

Some Expenses Will Decline

While there's no question we'll need a large nest egg to survive (let alone thrive) in retirement, some of the expenses we have today may no longer be a factor once age 65 rolls around for us. It's important to keep these in mind so we don't overestimate how much we'll need come retirement age.
  • Mortgage: Most Americans have paid off their mortgages by age 65. If you haven't kissed your mortgage goodbye and don't own your home outright, then you'll want to factor in more money to help you get to that point. But if your countdown until tear-up-the-mortgage day is on track to arrive before your retirement date, that's a big monthly bill you can cross off your planned expense list.
  • Child-related expenses: From the cost of back-to-school shopping to keeping a growing teenager clothed and fed, the costs of raising children will likely no longer be a part of your budget.
  • Food and entertainment: Although you'll still be out and about, the rate at which you go and do is likely to slow down some as your retirement progresses. You'll have fewer mouths to feed, and extravagant nights out may also lessen. And if you're still living on a budget, this is an easy category to put on the chopping block when times get tight.
  • Taxes: Because of your retirement status, your tax bill could dip significantly. While a large chunk of your earnings go to taxes right now, you'll probably be giving substantially less to Uncle Sam once you leave the workforce, especially if you've been putting money into investments that have tax-free disbursements in retirement, such as a Roth IRA or Roth 401(k).
Other Expenses Will Go Up

Overall, your day-to-day lifestyle will likely cost less than it currently does. Your life should be more settled and simplified, and fewer unexpected expenses should pop up. And while most of your spending will continue going to everyday living expenses, as mentioned above, there are a few new things you'll want to save for in retirement.
  • Health care: One major expense worth factoring into your budget is the possibility you'll need long-term care in-home care, or assisted living. At some point in retirement, those possibilities have a strong likelihood of becoming your expensive reality. According to a recent study, half of all people who buy a long-term care policy at age 60 (of the type that pays out immediately for eligible claims) will at some point use that policy.
  • Adult children needing financial help: You'll want to decide in advance what to do in the case that your adult offspring need help financially. If you do have some extra retirement savings, you may have opportunities to help them when they're in a financial pinch.
Retirement is no small expense, and it's important to start saving now, and investing that money in ways that will grow our money over time -- hopefully, faster than inflation eats away at it. When it comes down to it, we can't know the exact number we're going to need for retirement. But we do know that we're going to try to save as much as we can.

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Ups and Downs of Retirement Expenses: What Do You Need?

Securing a favorable interest rate is a prime way to maximize savings. On a major loan repayment like a mortgage, a little upfront effort can save you considerable amounts for years to come. To cash in on this frugal hack, you need to get your credit in shape. That means checking your credit history, making payments on time (and in full), and reducing your debt to available credit ratio as much as possible. It means paying down your balances on all your credit card accounts. The higher your credit score, the lower your interest payments and the higher your savings.

Adjust your withholding exemptions so that your payments to Uncle Sam match your actual tax liability, and you won't wind up with a big refund come April. As exciting as it is to get that big check in the mail, that's money you've been loaning to the government for free rather than having it grow in your own savings and investment accounts. As of the start of April this year, the average tax refund was $2,831. That's $235 a months' worth of money that could be working for you.

Just 10 to 20 minutes on the phone with your cable company, cell phone rep, or any other service provider can result in recurring monthly savings through old-fashioned negotiation. If you're not getting anywhere after asking for a lower rate, ask for the cancellation (or retention) department and see what offers start to come in. If you're unable to haggle down to get the savings you want, you can always shop providers to get your service elsewhere -- probably with a new-customer discount rate, too.

While bulk buying can sometimes lead to unnecessary purchases and overspending, it's a great strategy for savings on nonperishable items like paper products, cleaning supplies and alcohol. When you stock up, you save on the unit price and the trips to the store to restock.

Other than the obvious benefits of reduced health care costs over time, exercising and living a healthy, smoke-free lifestyle can provide some more immediate savings on your insurance premiums.

More stuff equals more to maintain, clean and devote time and energy to. From the size of your home to the size of your clothing collection, more "stuff" generates more expenses. Downsize and watch your savings soar.

For each year after full retirement age that you delay taking Social Security benefits, you accumulate a permanent increase in your benefits of 5 to 8 percent until age 70. This one strategy can increase your Social Security retirement income by more than 25 percent. It would take a lot of penny-pinching to add up to that kind of income boost.
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