How to Estimate Retirement Expenses

A good way to begin to estimate retirement expenses is to use your current monthly take-home pay as a starting place, and then ask a few additional questions.

  • What is your monthly take-home pay? (This is what gets deposited to you after all deductions for taxes, retirement plans, insurance, etc.)
  • What expenses come out of your paycheck that you will have to pay out-of-pocket once you are retired? (For example, health insurance.)
  • What extra expenses do you want to budget for during retirement? This would include things like travel, or extra money for health care expenses.

Be sure to build in monthly savings for items that will eventually need to be replaced such as major home repairs or automobile purchases.

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. If you must dress for success at work, perhaps in retirement, your dry cleaning bill will decrease.

Travel Plans in Retirement

One of the most exciting aspects of retirement planning is envisioning the lifestyle you’ll enjoy. For many retirees, travel is a big part of the picture. According to the 18th Annual Transamerica Retirement Survey, 70 percent of American workers dream of traveling once they retiree.

There’s one potential obstacle standing in the way of those dreams: the cost. The average retiree spends $11,077 per year on travel. Meanwhile, the mean after-tax household income for seniors 65 and older was $44,051 as of 2017.

That may not leave much wiggle room for seeing the world but, according to Transamerica 59 percent of workers are confident that their financial strategy will allow them to travel in retirement. Making the numbers work to accommodate your travel plans involves budgeting and financial goal-setting, both before and after you retire.

Medicare and Medigap Options

Generally, the different parts of Medicare help cover specific services. Most beneficiaries choose to receive their Parts A and B benefits through Original Medicare, the traditional fee-for-service program offered directly through the federal government. It is sometimes called Traditional Medicare or Fee-for-Service (FFS) Medicare. Under Original Medicare, the government pays directly for the health care services you receive. You can see any doctor and hospital that takes Medicare (and most do) anywhere in the country. It is important to understand your Medicare coverage choices and to pick your coverage carefully. How you choose to get your benefits and who you get them from can affect your out-of-pocket costs and where you can get your care. For instance, in Original Medicare, you are covered to go to nearly all doctors and hospitals in the country. On the other hand, Medicare Advantage Plans typically have network restrictions, meaning that you will likely be more limited in your choice of doctors and hospitals. However, Medicare Advantage Plans can also provide additional benefits that Original Medicare does not cover, such as routine vision or dental care.

Required Minimum Distributions

Planning for RMD at 70½. When calculating a required minimum distribution (RMD) for any given year, it is always wise to confirm on the Internal Revenue Services website that you are using the latest calculation worksheets. Different situations call for different calculation tables. For example, IRA account holders whose spouse is the account's only beneficiary and is more than 10 years younger than the account holder use one table, while IRA account holders whose spouse is the account's only beneficiary and the same age as the account holder use a different table.

The RMD calculation involves three steps.

  1. Write down the account's balance as of Dec. 31 of the previous year.
  2. Find the distribution factor listed on the calculation tables that corresponds to your age on your birthday of the current year. For most people, this factor number ranges from 27.4 all the way down to 1.9. As a person gets older, the factor number goes down.
  3. Divide the account balance by the factor number to find the RMD.

Deciding on LTC or Catastrophic Illness

About half of 65-year-olds today will eventually develop a disability and require some long-term care services, according to a study revised in 2016 by the Urban Institute and the U.S. Department of Health & Human Services. Most will need services for less than two years, but about 14 percent will require care for more than five years.  Regular health insurance doesn’t cover long-term care. And Medicare won’t come to the rescue, either; it covers only short nursing home stays or limited amounts of home health care when you require skilled nursing or rehab. It does not pay for custodial care, which includes supervision and help with day-to-day tasks.  If you don’t have insurance to cover long-term care, you’ll have to pay for it yourself. You can get help through Medicaid, the federal and state health insurance program for those with low incomes, but only after you’ve exhausted most of your savings.