How to Estimate Your Retirement Expenses

If your retirement date is approaching and you now have some idea of how you’d like to spend your time, the next item on your retirement plan begins with estimating your cost of living and working out a budget to cover your expenses.

Know your spending

You have already established a lifestyle that’s not going to suddenly change overnight just because you’ll no longer be working. So, instead of focusing on replacing a percentage of your employment income, take a look at your expenses.

A good starting point is to look at your current expenses and then begin thinking about the future.

calculating retirement expenses

Although a lot can change between now and when you retire, there are some things you can predict.  Use a worksheet like this retirement budget calculator.  It can give you a pretty clear idea of where you stand.

How much are you spending now, and how will that change?

What deductions will you no longer have (e.g. pension, union dues)?

What expenses come off your paycheque that you will have to pay out-of-pocket when you retire (e.g. health and dental plans)? For example, if your employer has been paying for health care premiums, once retired you’ll likely have to pick up the tab.  Shop for extended care plans now.

A lot of your basic outlays will likely stay the same (food, utilities, property taxes, phone plan, haircuts), but most of us will experience a reduction in expenses in retirement – the mortgage is gone, child related expenses are done, and costs associated with working (e.g. transportation, work clothes) are reduced.

Please make a concerted effort to pay off your debts while you are still working.

What will your desired lifestyle cost you?

Some of your pre-retirement costs will be replaced by others such as hobbies and travel, so don’t expect your expenses to be drastically reduced, especially at first.

Almost every activity costs money these days, so don’t forget to list things like season tickets, Star Trek conventions, gym memberships, Sunday brunches, and hobbies.  Most people allow for big trips but forget the tank of gas to go to the lake and eating out when you’re there.  How much will the fun stuff cost you?

Fortunately it’s easy to find free or cheap things to do, especially when you take advantage of the many entertainment-related senior discounts available.

Also, avoid common retirement budget mistakes such as forgetting about items that don’t occur regularly – replacing tires and fixing the car, a new mattress or computer. Estimate future home maintenance costs – roof, furnace and appliances. At some point you may have to spring for a new vehicle or comparable transportation costs.

Be sure to account for gifts and charitable donations.  What about if your children need some financial assistance, or your parents?  Maybe you want to contribute to your grandkids’ RESPs. 

It’s a good idea to create a savings fund and set aside a monthly amount to cover those infrequent, hard to predict, large items.

A few years into retirement you’ll pretty much know what your spending patterns will be.

Related: Practice Retirement While Still Working

Don’t forget taxes

Income tax could be your biggest annual expense, although if you will have mainly government benefits or investments not in a retirement plan you may pay little or no taxes.

On the other hand, if you will have pension income or will draw from retirement plans, your tax rate may be higher than you think.

Related: How Retirement Can Affect Your Taxes

Do a quick estimate of the tax you will owe on your proposed retirement income with this calculator.

The bottom line

I know all this calculating can be tedious and time-consuming, but it’s so easy just to drift along, covering your expenses as they come up and spending when you think you need something.

Spend some serious time with this. The biggest mistakes pre-retirees make are underestimating how much they need to spend in retirement to have a comfortable lifestyle and overspending because they missed items.  You don’t want to be spending too much of your nest egg too soon.

Listing your expenses helps you determine how much you will need so you’ll be able to make smart choices about the retirement lifestyle you want.

Once you have an estimate of how much you’ll need to spend each year you’ll move to the next step in the planning process and look at your sources of income.

Also read:  Designing Your Retirement Lifestyle

                     Determining Your Retirement Income

                     Assessing Your Retirement Cash Flow



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