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How to Estimate Your Retirement Expenses

Geoff Williams

Retirement is almost as inevitable as death and taxes. Even if you love your career, someday you'll almost certainly retire -- or take on a form of semi-retirement.

This is why estimating your retirement expenses is so important. Understanding what you can live on when you're retired can mean the difference between retiring too early and being broke -- and retiring at an ideal time and being financially stable. But knowing you need to estimate your retirement expenses and knowing how to do it are two different things entirely. There's no one right way to calculate how much money you're going to spend during your retirement, but as you crunch those numbers, you'll want to keep several strategies in mind.

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Estimate high. Along with what expenses you think you'll need to spend, you'll be better off trying to save enough so that there isn't a major difference in your spending when you go from working to retirement, says Tom Chandler, a financial advisor with Ameriprise Financial in Roseville, California. In other words, don't plan on spending far less than you do now.

Chandler, who has been doing this for over 25 years, says, "I can tell you emphatically that most people I come across hate to budget their expenses."

So Chandler suggests taking your current take-home pay and deducting expenses that you aren't likely to pay during your retirement. For instance, if you have a mortgage payment now but you won't during retirement, remove that from your list of expenses. Maybe you also pay to park your car at work? And you commute every day, and so your car's gas expenses will be lower? Get rid of those.

Whatever bills and expenses are left over is a ballpark figure on your monthly expenses during retirement, unless you plan on downsizing considerably.

"I've found most people want to maintain their same standard of living, and this gives them a quick way to estimate what they might need for spending," Chandler says.

He adds, "Of course, to be more accurate, you will have to prepare a budget." But he suggests being brutally honest and planning a budget that isn't sparse, but is one that includes what you're likely going to actually spend.

So if you love your daily iced coffee or football season tickets, put those in your budget. If you plan on traveling or taking up a new hobby, you'll want to include those projections as well. If you have to take them out later, then you have to take them out.

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Don't forget inflation. If you're retiring soon -- say, in three years -- you may not see much need to think about inflation. But if you're planning on sticking around for a good long while, and you'll be retired for all that time, then, yes, inflation is going to impact your retirement expenses.

Inflation is also a reason to go with Chandler's advice and assume that what you're spending now is going to be pretty close to what you will spend in retirement. Maybe you won't be making a mortgage payment in your retirement, but the price of gas will go up. So will the price of food. So will the cost of the clothes and the smartphone you buy. And on it goes.

If you're skeptical that inflation matters all that much when it comes to your retirement, there are a number of good inflation calculators online that you could play around with to get a sense of how prices have climbed over the decades. The Bureau of Labor Statistics has one, and if you plug in $100 into the year 2000, you'll see that $100 in 2000 has the same buying power as $146 does today.

Think about taxes and insurance. If your mortgage is paid off by the time you retire, you still have to pay property taxes and homeowners insurance.

You'll also want to budget for paying any taxes from IRA withdrawals as well as withdrawals from 401(k) plans, 403(b) plans, 457 plans, pensions or any other tools that you're funding your retirement with.

Then there are medical expenses. This is going to be the most challenging part to estimate, says virtually everyone.

"Health care insurance premiums and treatment costs could increase substantially," says Carol Gosho, who has a financial planning firm, Gosho Financial Group, in San Mateo, California.

She adds that down the road, you may need to pay for a caregiver's help or a residence at an assisted-living facility. "Long-term care or eldercare is a huge unknown and could be budget-busting," she says.

Planning for an unknown like health care isn't easy, especially if your income is tight. But you'll likely be paying Medicare Part B premiums, possibly a Medicare Advantage policy (covering things like eye care and dental), Medicare Part D coverage (for your pharmaceuticals) and perhaps long-term care insurance premiums.

[See: 10 Costs You Can Eliminate in Retirement.]

Plan for the little expenses. We know that big expenses like replacing car brakes or an alternator are pricey, but the minor expenses can add up, too.

"The problem with budgeting is these are typically small items that are a nuisance to budget for, and as a result they are unmanaged and can add up to hundreds or thousands of dollars a month," says Len Hayduchok, president of Dedicated Financial Services, a financial planning firm in Hamilton, New Jersey.

Because of that, when you do budget, he suggests planning a certain amount of money for discretionary purchases -- meaning money for that impromptu snack at the vending machine and the shoes you buy just because -- and that you stay within that set amount of cash or credit every week or month, so you aren't constantly going to the ATM or using your debit card. Otherwise, "it's almost a bottomless pit," he says.

Try living off your budget before you have to. But once you do think you've figured out how much you can live off during you retirement, give it a test run, Hayduchok recommends.

"While they are working, people need to get used to spending the same amount of discretionary money that they will spend in retirement, so they don't suffer from lower-spending shock," he says.

And if you do suffer from lower-spending shock? Then it's back to the budgeting drawing board -- or start putting away more money for retirement. But better to find out now than later that you aren't ready to live off your retirement savings.

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