One of the most significant problems with most people’s retirement plans is that they do not account for changes in spending levels over the years. Most retirees will likely plan for inflationary adjustments, but is it really reasonable to think that your inflation-adjusted costs for property taxes, healthcare, income taxes and more will all remain the same? If you have ever opened an old budget file on your computer that you created years ago, you may be well aware that budgets can change very dramatically from year to year. With this in mind, the best planning efforts for your later years in life will include increasing rather than decreasing levels of expenses.
The Issue of Healthcare Expenses
If you are like most adults who are preparing to retire, your planning efforts may include most of your medical expenses being paid for through Medicare. However, the media is filled with stories about pending changes to Medicare coverage. In addition, the reality is that most seniors tend to need more rather than fewer health services as they get older. The bottom line is that your medical expenses can increase rather dramatically throughout your retired years, and your financial plan needs to take this into account. Without properly planning for what may equate to several hundred dollars or more per month in additional expenses, there is a very real chance that your budget may fall short of meeting your needs.
Preparing for Tax Changes
Taxes are also a great unknown when you are preparing to retire. This includes your property taxes as well as income taxes. These tax rates can vary from year to year, and it may seem more likely that they will increase rather than decrease in the future. Even if your incoming cashflow remains steady, you may still pay a higher percentage in taxes. This can detract from the overall amount of money you have available to spend when you are retired. In some cases, this may equate to several hundred dollars or more less per month.
Increased Living Expenses
Some people believe that living expenses will naturally decline as you get older. For example, you may plan to spend your first few years out of the workforce on the golf course. While golfing can be expensive, your health will eventually decline, and you may find yourself golfing less frequently. The thought of spending your days at home in front of the TV or curled up with a good book sounds very affordable. However, you may need in-home care at some point, cleaning or landscaping services to care for your home and more. You may even need to sell the home and move into an assisted living facility. These long-term care facilities can cost a modest fortune. You can see that these increased living expenses are not simply inflationary adjustments. They add new expenses to the budget.
How to Create a More Realistic Budget
If you are serious about being financially prepared in retirement, you need to create a budget that is as realistic as possible. One smart idea is to consider living more frugally during your first few years, and this can help you to stretch your funds for a longer period of time. Remember that funds that you do not take out of your account immediately will have more time to grow over the years. You may also want to create a separate budget for every five-year period of your life rather than one budget that is supposed to cover a 20 or 30-year span.
We are here to answer your pre-retirement or retirement questions.
Eric and Jennifer Lahaie
JEHM Wealth & Retirement
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