Forecasting expenses in the distant future, particularly over the span of several decades, poses a considerable challenge. As we funnel funds into our IRAs or 401(k)s, the prevailing sentiment often leans toward a hopeful outlook, with the belief that steadfast financial contributions will pave the way for a cushy retirement. However, there are certain underestimated variables in the calculation of retirement expenses. Being mindful of these five factors could assist in formulating a more accurate and pragmatic retirement budget.
1. Taxes
In addition to pursuing warmer climates, a significant number of retirees are drawn to specific states due to differences in the treatment of retirement income within those regions. Kiplinger shares a list of the 10 Most Tax-Friendly States for Retirees, and that list includes some more well-known retirement hubs, such as Florida and Alaska, alongside states such as Tennessee, Wyoming and Pennsylvania.
However, the prospect of relocating to another state may lack appeal for many retirees, despite the financial incentives. Whether due to proximity to family members or ingrained connections in social and religious communities, many retirees express a desire to stay put in their current states and homes. If this sentiment resonates with you and you reside in a state that taxes income and Social Security benefits, it may be prudent to increase your monthly contributions and save more.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
2. Inflation
When calculating the monthly income needed in retirement, it’s important to consider the impact of inflation. For example, $100 worth of groceries in the year 2001 cost $143.56 in 2021, according to rateinflation.com.
Assuming an annual inflation rate of 3%, an individual who wishes to maintain their current lifestyle at $5,000 per month in 2023 should budget for about $11,783 in 2052.
3. Health care and long-term care
Fidelity suggests that an average retired couple age 65 in 2023 would need about $315,000 to cover health care costs during retirement.
Although it may be unpleasant to think about, there is also the possibility that you or your partner may need to live in a long-term care facility. According to a study by Genworth, a private room in a nursing home costs $315 per day, or $9,584 per month, in 2023.
4. Supporting others
As advancements in science and medicine persistently extend the average lifespan, an increasing number of adults find themselves navigating the challenges of the "sandwich generation." This term encompasses individuals who, amid the evolving landscape of longevity, are tending to the needs of elderly parents while also providing support for their adult children.
According to Pew Research Center, more than half of Americans in their 40s are in a sandwich situation, while 36% of those in their 50s, 27% of those in their 30s, 6% of those under 30 and 7% of those 60 and older are in this situation.
5. The fun stuff
Concluding our exploration of retirement expenses is perhaps the most captivating category often overlooked in budgeting — new (and cherished) hobbies! In retirement, the inclination to explore pursuits previously deferred or embrace entirely novel hobbies often takes center stage.
Travel, too, can incur significant costs, especially when relocating, which may require more frequent trips to connect with friends and family. Budgeting for extracurricular activities and travel will allow you to fully take advantage of the resource that was scarce during your working years — time.
For a detailed retirement planning worksheet, you can check out Equi’s free downloadable worksheet here.
Related Content
-
Retire in Costa Rica With These Three Tax BenefitsRetirement Taxes Costa Rica may be a good place for retirement if you like the low cost of living and savings for your heirs.
-
Five Ways to Ease Caregiver StressCaregiver stress is real. Here are five techniques to protect your health and happiness while caring for a loved one.
-
Financial Strategies Borrowed From the Big Game's PlaybookLike the best football teams, you can win at financial planning by executing a strategy, making halftime adjustments and staying focused on the ultimate prize.
-
Three Ways to Plan Now for a Social Security Shortfall LaterThe outlook for Social Security is gloomy, but you can save now to protect against benefit cuts later. If the cuts don't happen, you'll still be better off.
-
Extra Cash? Should You Pay Off Debt or Invest?Depending on your financial situation, you might benefit from paying off debt, investing or both. Here are some things to consider before deciding.
-
The Future of 1031 Exchanges Under Trump Looks BrightAs a real estate investor himself, President Trump appears poised to preserve the tax-deferring power of this strategy. But you still must follow the rules.
-
Gambling vs Investing: How to Tell the DifferenceIt's easy to get caught up in the excitement of placing a bet on the Big Game, but beware of letting that emotion drive your investing decisions.
-
Empowering Widows: Five Goals for Financial Security in 2025Tackling these strategies one at a time, whether it's updating estate planning or reassessing investments, can help put you on track for financial stability.
-
Private Credit: Coming Soon to a Portfolio Near YouPrivate credit could be a good source of diversification for sophisticated investors, but beware of the risks.
-
What Is Insurance Good For? Let Us Count the WaysYou might resent having to pay premiums, but when disaster or just a minor fender-bender happens, you'll be happy you have the financial backup.
