NEW YORK (Money) -- How can I go about calculating the expenses I should expect in retirement? -- Bozena Thrower, Portland, Conn.
When the big "R" is still decades down the road, it's virtually impossible to tell how much you'll actually spend. So for most of your working days, it's okay to rely on the rule of thumb that says you'll need roughly 80% to 90% of your pre-retirement income to maintain your standard of living once your retire.
The rationale behind that ratio, which is based on studies done over the past 20-odd years by Georgia State University and Aon Consulting, is that you can live as well on less income after retiring, since you'll no longer have to save for retirement or shell out for work-related expenses.
Once you're within five to 10 years of calling it a career, however, "rules of thumb aren't much help," says Bohemia, N.Y.-based financial planner Ron Rogé. At this point, you'll have a clearer sense of your expected costs, which will help you make more personalized calculations.
This math is important, says Rogé, because "the amount you'll spend once you retire can vary substantially depending on factors like how much debt you have and what sort of lifestyle you lead."
So unless you want to risk spending at a rate that may drain your funds too quickly, you need to sit down and make a retirement budget.
Start the process by doing what I like to call "lifestyle planning" -- that is, envisioning how you'll spend your time once you're free of the 9-to-5 shackles.
Do you plan to stay in your current digs or relocate? Travel widely or stick close to home? Would you like to pursue any type of work, whether part-time or consulting? Will you enjoy the same activities you've been pursuing for years or mix it up a bit, perhaps starting a new hobby?
Once you've given thought to how you'll live, put some numbers to your vision. While you can do that with pen and paper, I prefer the interactive budget worksheet that's part of Fidelity's Retirement Income Planner.
It offers 43 categories -- from housing to cable TV -- among which you can divvy up your spending, so you can be sure you don't forget anything major. There are slots to add six more custom expenditures.
Even better, you can check a box designating an expense as essential (versus discretionary), a feature that makes it easier to see where you could tighten your belt.
Plus, you have the option of setting a specific period for individual expenses -- allowing you to budget, say, for a mortgage you plan to pay off in five years. The tool automatically adjusts for inflation, too: 7% a year for health care, based on estimates from the Centers for Medicare & Medicaid Services, 2.3% for everything else.
Filling in this worksheet will require some homework. You may need to dig up bills to estimate costs in certain categories. If you plan to relocate, use our Cost of Living Comparison tool to get an idea of how expenses like housing, utilities, and groceries vary in different cities. Similarly, if you plan to travel more, check out travel sites to get a handle on costs.
Of course, unless you're clairvoyant you can't predict what your expenses will be in a new and different phase of life. But at least at the end of this exercise, you'll have a benchmark that's more tailored to your situation than the 80% rule.
Keep in mind that your spending in retirement won't necessarily follow a straight line. Life's not as predictable as a spreadsheet. There will always be outlays that catch you unaware: the roof that was supposed to last 30 years but now leaks, the kids who seemed secure in their careers but now need financial help.
No matter how meticulous you are, your planned and actual outlays will never completely jibe. The area you should expect to undergo the biggest shift: health care, which -- as the graphic above shows -- is likely to account for a larger share of your spending as you age.
It's especially tough to get a fix on expected yearly medical costs, but you can get a rough idea using HealthView Services' health care expenses calculator.
The fact that certain expenses are unpredictable underscores the importance of updating your budget every year leading up to retirement, and then even once you've quit work.
By plugging your latest figures into Fidelity's Retirement Income Planner, you'll also see whether the level of spending you budgeted is sustainable. If it's not, you can take a closer look at your discretionary expenses.
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