How do you ensure that you will save enough funds to live comfortably in retirement? This is a question that rings through the minds of many Canadians. Fortunately, you can estimate your retirement expenses to a large extent when you consider relevant factors such as your current and expected lifestyle, your dependents, and retirement goals, amongst others. This article discusses things to consider in order to ensure that your retirement expenditures are well planned for.
Possible expenses in retirement can fall into three major categories: fixed expenses, variable expenses, and one-off expenses. It is important to classify these expenses and incorporate them into your retirement budget accordingly.
Some expenses you incur weekly or monthly stay the same for long periods; these types of expenses are usually referred to as fixed expenses. An example of a fixed expense is housing costs for either rental payments or mortgage payments. Your rental or mortgage expenses are usually fixed for longer periods of one to five years. Other fixed expenses you may incur in retirement are any insurance payments –– for items such as a car, house or health, phone bills, subscription expenses, amongst others.
Lifestyle expenses that change every week or month are considered variable expenses. For example, the amount you would spend on groceries may be similar but not the same every month. You would most likely also spend varying amounts of money on clothes in different periods. Your travel and entertainment expenses would also not be fixed and can change for different months in your years of retirement.
Many people give thought to fixed and variable expenses in retirement but forget to identify possible one-off expenses that could potentially throw off their retirement budget. A good example of this would be paying for items such as a wedding or funeral. Emergency expenses could also spring up in retirement, and this could range from little amounts for fixing home appliances to bigger items such as medical bills. Ensure that you capture one-off expenses into your retirement plan either through insurance or savings.
When you decide to start budgeting for retirement savings, these factors below can help you make more informed and applicable decisions.
To estimate your future retirement expenses, an excellent place to begin is by reviewing your current lifestyle and how you would expect that to change or not. Generally, most people spend less than they currently do in retirement. This could mean different things for different people. You could cut down on your expenses by as much as 50 percent and only need 50 percent less money, or you could reduce your lifestyle expenses by as little as 20 percent and need to save up for 70 percent of your current expenses for retirement.
A reduction in expenses is usually expected because you would reduce spending on items such as transportation, mortgage payments –– if your house has been fully paid off, or children’s education –– if they have grown past the dependent stage and work to support themselves.
However, for some people, their future retirement plans may include expenses that keep them at the same level of spending or even more.
Caring for dependents requires a significant amount of money. All the seemingly small amounts spent on feeding, clothing, education, or medical care all add up. If you had children or other family members you would regularly support when you retire, budget for this expense accordingly.
Any debts or money you owe would affect how much you need to budget for in retirement. A great example is a mortgage. If you have a mortgage and do not complete your mortgage payments before you retire, you will make up your monthly expenses in retirement. Also, if you had taken any loan for personal reasons –– car loan, college loan, or business loan –– and still need to pay it after you retire, you would need to add this to your expected expenses.
Don’t forget to budget for any taxes that may apply to your pension income and any other income you earn in retirement.
Many people look forward to their retirement days, a time of little to no work and so much time to either travel or focus on other personal areas of fulfillment. Your retirement goals would determine how much you would spend periodically. For those who dream of days by the beach, this would mean expenses for travel such as flight, accommodation, feeding, travel insurance, etc. Whatever your retirement goals may be, now is the time to start saving up for them.
You may need to save up for health-related expenses that are not covered by private insurance or government healthcare benefits. Some people elect to purchase insurance for events such as long-term disability or critical care. While this is not compulsory, it may be beneficial to cover unforeseen or expected health concerns in retirement.
It is essential to budget for your retirement expenses as this helps you have a clearer picture of the kind of lifestyle you want to live when you stop active employment and have all the time on your hands. Having a planned budget allows you to consider various factors and how they impact your ability to afford the retirement of your dreams. Retirement expenses have to be covered in one way or the other. When government pension programs such as the Canada Pension Plan (CPP) or the Old Age Security (OAS) are insufficient, you can use other personal retirement savings programs to fill in the gap.
Your retirement budget should be a dynamic and flexible one as this ensures that you can accommodate different life changes as they occur. For example, as years pass by, you may have grandchildren whose expenses may become incorporated into your budget. There is no perfect one-size-fits-all retirement budget. What really matters is that your budget works for your expected circumstances and retirement lifestyle.
