Retirement is almost as inevitable as death and taxes. Even if you love your career, someday you'll almost certainly retire – or take on a form of semi-retirement. Therefore, estimating your retirement expenses is so important. Understanding what you can live on when you're retired can mean the difference between retiring too early and being broke – and retiring at an ideal time and being financially stable. But knowing you need to estimate your retirement expenses and knowing how to do it are two different things entirely. There's no one right way to calculate how much money you're going to spend during your retirement, but a rule of thumb is assume you need a lot more money than you think. Then plan to need even more.
To more accurately determine how much money you will need to retire, you must estimate your retirement expenses. Here's how…
Now vs. Then
A good way to begin to estimate retirement expenses is to use your current monthly take-home salary as a starting place, and then ask a few additional questions. Use the following 3 questions to guide you through this process:
What is your monthly take-home salary? (This is what gets deposited to you after all deductions for taxes, pension contributions, medical insurance, etc.)
What expenses come out of your salary that you will have to pay out-of-pocket once you are retired? (For example, medical-aid.)
Do you have expenses that will decrease in retirement? (For example, if you have a long commute to work, your transportation costs may decrease after retirement.)
The above 3 questions are not definitive but are a good place to start. The aim is to get you thinking. What will you be doing for the first 5 years of retirement and what will that cost? What will be different in the next 5? And so on…
Phasing into Retirement
Another idea is to just budget for different phases of retirement.
Stage 1 — The Transition to Retirement: For many people, the first stage of retirement is not retirement at all — it is the transition to retirement. In this phase you may work part time or have a retirement job and your spending will likely stay as it has been.
Stage 2 — Early Retirement: The second phase of retirement is when your focus is primarily on leisure. During this stage, your spending might increase as you suddenly have a lot of extra time and your time is spent spending money instead of earning it.
Stage 3 — Later Retirement: As you get older, your health might decline, and you may find that you want to slow down. Spending may really decrease during this phase.
Stage 4 – Dying: For many people, the last two years of life are the most expensive. Long term care and medical costs spike for most people at the very end. The fact is that dying is very expensive.
Your retirement savings “number” gets a lot of press. But even more important than that is your expense number. Understanding your expenses is a critical stepping stone to building wealth and retiring comfortably. If you still don’t know where your money goes, why not get started today by setting up a consultation with Luthuli Capital?