5 Things Often Overlooked in Your Retirement Budget
When preparing your retirement budget, it’s sometimes hard to anticipate every expense. One of the biggest mistakes newly retired people make is underestimating how much they will spend to achieve a comfortable lifestyle.
When some unexpected “one -time” expense comes up it can derail even the most carefully thought out budget. Then you’ll be wondering where all the money went.
Are these five things missing from your retirement budget?
1. Income tax
Most retirees were used to being paid by their employers in after-tax dollars. At retirement, they don’t allow for the taxes that have to be paid on their pensions and registered plan withdrawals.
You can have tax deducted at the source for CPP and OAS payments. Otherwise, set aside enough money monthly to pay the tax bill when it comes due.
2. Health insurance and medical expenses
Health insurance can easily be left out of a budget if your employer was paying premiums or they were deducted from your paycheque when you were working. Once retired you will have to pick up the tab.
We have a good health care system in Canada, but it only goes so far. There are many medical expenses not covered by provincial plans or private health care. Or, the waiting time is so long you may opt for a private procedure – and that will cost you.
A BMO Wealth report says retirees over the age of 65 expect to spend an average of $5,391 in out-of-pocket medical expenses every year. I don’t usually like these polls because they tend to lump everyone over 65 together and obviously you will likely spend more the older you get.
Prescription drugs are one major cost and chronic medical conditions increase as we age. Drug plans may cover some medications, but not all, and the premiums might be high.
Related: Positive Aging
You may be active and healthy enough now to climb the steps at Chichen Itza but project forward a decade or two and you might be looking at such things as hearing aids, lift chairs, mobility aids (canes, walkers, motorized wheelchairs), and health professionals such as home care, assisted living and long-term care.
3. Vacations, hobbies and recreation
You need to include money for travel and fun. Consider how your hobbies and lifestyle may change. This will alter the way you spend. You need to budget more if you have expensive hobbies.
It’s easy for spending on hobbies and recreation to get out of hand. Travel may slow down over the years, but during the first 10 – 15 years or so of retirement plan on spending as much – or more – as you did before retirement. Most new retirees tend to overspend in the first few years because there’s so much they want to do.
Don’t just plan for the one nice vacation you want to take each year. Allow for those weekend jaunts and trips to see your family, too.
Don’t forget that as you get older you may want more comfortable amenities on your travels. You’re likely not up for backpacking long distances and staying at limited service hostels.
If necessary, think about changes you may be willing to make that would reallocate money to this category.
4. Home and auto expenses
Even if you think you’re done with home renovations, plans often change. You may have to retrofit you home to allow you to stay there as you become less mobile.
As much as we wish our home appliances would last forever, they won’t. Replacing those appliances, getting new outdoor furniture, updating your mattress and replacing computers and TVs as technology advances, will happen at some point – as will car repairs and new tires.
Many couples reduce to one vehicle after leaving the work force, but your current vehicle is probably not going to last throughout your retirement. Thinking you’ll have a drastic reduction in kilometres driven making your vehicle last longer can give you a false sense of security. A huge engine or transmission repair bill can be quite a shock.
Whether you pay cash, or finance and have a monthly payment, at some point you will have the expense of a newer vehicle. Best to have a plan.
5. Parents and children
Many couples retire with a solid retirement plan and then their children or grandchildren get into financial trouble. They understandably want to help out, which is fine. But you will have to make adjustments in your budget to cover your generosity.
Related: Boomerang kids
This type of scenario is becoming more common: Shirley, a 69-year-old widow initially refinanced her home to do some house repairs. She was talked into a higher debt amount by her lender. She then used this extra money to assist her daughter with divorce legal fees, help her grandson pay tuition and buy a car to get to school, took her whole family on a cruise, and “invested” in her son’s new business venture.
If you expect to be involved in caring for a parent, factor in the potential costs. A serious illness might have your parent moving in with you, or you may need to help with medical bills.
You can quickly get into money trouble by saying yes too often.
The bottom line
Wise retirement planning involves analyzing your current expenses and anticipating your future outlays.
You don’t want to have to cash out assets or raid your home equity to make ends meet.
Set up some categories into your budget where you set aside a monthly amount in a savings account that you can dip into so these expenses don’t derail your carefully prepared budget.
Your best defense is to plan ahead and establish a proper savings and emergency cushion.