Estimating expenses for the distant future, spanning several decades, presents a formidable challenge. The majority of people diligently contribute to IRAs and 401(k)s, with the belief that consistent financial contributions will secure a comfortable retirement. Nevertheless, certain often-overlooked variables exist that influence the calculation of retirement expenses. Being attentive to these five factors can help create a more precise and practical retirement budget.
Taxation
Aside from the allure of relocating to warmer climates, many retirees are enticed by specific states due to variations in the treatment of retirement income in those regions. Well-known retirement destinations such as Florida and Alaska, as well as states like Tennessee, Wyoming, and Pennsylvania, are popular for their taxation of retirement income.
The idea of moving to another state may not be appealing despite potential financial advantages. Whether it’s the proximity to family or deep-rooted connections in social and religious communities, many retirees prefer to remain in their current states and homes. If you share this sentiment and live in a state that taxes income and Social Security benefits, it might be wise to increase your monthly contributions and save more.
Inflation
When determining the monthly income required for retirement, it’s crucial to factor in the impact of inflation. For instance, $100 worth of groceries in 2001 equated to $143.56 in 2021, according to rateinflation.com.
Assuming an annual inflation rate of 3%, an individual aiming to maintain their current $5,000 per month lifestyle in 2024 should budget for approximately $11,783 in 2052.
Healthcare and Long-Term Care
According to Fidelity, an average 65-year-old couple in 2024 would need around $315,000 to cover healthcare expenses during retirement.
Although it may not be a pleasant thought, there’s also the possibility that you or your partner may require long-term care. According to a Genworth study, a private room in a nursing home costs $315 per day, or $9,584 per month, in 2024.
Supporting Dependents
As advances in science and medicine continuously extend the average lifespan, an increasing number of adults find themselves navigating the challenges of the “sandwich generation.” This term encompasses individuals who, amidst the changing landscape of longevity, are tending to the needs of elderly parents while also providing support to their adult children.
According to the Pew Research Center, over half of Americans in their 40s are in a sandwich situation, with 36% of those in their 50s, 27% in their 30s, 6% under 30, and 7% aged 60 and older facing similar circumstances.
Enjoyable Pursuits
Concluding our exploration of retirement expenses is perhaps the most alluring category often overlooked in budgeting — new (and cherished) hobbies! In retirement, the inclination to explore postponed interests or embrace entirely novel pastimes often takes center stage.
Travel, in particular, can entail significant costs, especially if you decide to relocate, which might necessitate more frequent trips to connect with friends and family. Allocating funds for extracurricular activities and travel in your working years will enable you to fully capitalize on your retirement