Having a retirement plan to follow is one of the most important steps to take towards financial freedom. But too many people try to finish their plan in one take, leaving out important details that could make a huge difference. For example, it’s difficult to estimate your retirement expenses early in life because prices may significantly change by the time you retire. Here are some commonly missed retirement expenses you need to think about:
Consider inflation, but not everything inflates. Some people forget to account for inflation, which will throw off any plan. But even if inflation is accounted for, not everything is going to grow at a steady 3 percent pace year after year. For example, where I live in California, property taxes can only go up by 2 percent a year. If I instead used an across the board 3 percent increase every year in my calculation I would be needlessly worrying about the effects of inflation. Another example where 3 percent inflation doesn’t apply is my mortgage, which won’t increase from year to year.
Some expenses will disappear. Speaking of mortgages, these debts, like every other, are meant to be paid off. This means that not only will the payment stay the same as long as you have a fixed rate, but you don't have to account for the expense indefinitely either.
There are still taxes in retirement. Many people will still need to file a tax return in retirement, even though they don't receive a regular paycheck anymore. Social Security, pensions, IRA and 401(k) withdrawals, and gains when you sell your investments are all taxable at different rates. Taxes can be one of the biggest retirement expenses, so make sure to include them in your retirement budget.
Unexpected expenses will continue to arise. You certainly need enough money to cover all your monthly bills in retirement. But you also need extra income to cover sudden expenses, such as your car or washing machine breaking down. You’ll also need to continue to occasionally maintain your home. And if you develop a chronic health condition, you may experience significant increases in your out-of-pocket medical spending, especially if you end up needing long-term care. Make sure your retirement savings includes a cushion for unexpected expenses.
Lifestyle changes will lead to different types of expenses. Think about how you will spend your time in retirement and how your expenses will change. You will no longer commute to work, so you might save some money on gas. But you could pick up a hobby that requires new equipment or go out more for dinner because you have more time on your hands. Many people account for travel in their retirement budget, but not everybody remembers to factor in extra movie costs because of the newfound free time.
Smart choices can save you money in retirement, but your expenses won’t always decrease after you leave your job. Make sure you account for these unexpected potential expenses before you hand the boss your retirement letter.
David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.