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Much has been written describing rules of thumb for estimating living expenses during retirement.  If you are close to retirement, you may hear suggestions that your retirement expenses will be only 70%-90% of your pre-retirement expenses.  While this may be possible, the accuracy of this estimate is very important to your financial well-being, and we recommend approaching it in a more systematic way.  Even if you are already retired, the calculation is not as simple as projecting your current expense level forward.


It may be useful to think of retirement years as being made up of three stages: early, middle, and late, with each stage having unique and somewhat typical expenses patterns.


Early years

You may need more money in the early years of retirement.

Typically, newly retired persons spend more money than those that have been retired for a few years due to travel, recreation, or care for elderly parents.


Middle years

The second and usually longest phase of retirement is a time in which you (and your spouse) have "settled down."

During these years, you may consider issues such as relocation and decreasing your spending.

Budgeting becomes more important.


Later years

Medical expenses can be quite large.

Underestimating your expenses in this third phase of retirement is a common mistake.


For any stage during retirement, or just prior to retirement, we advocate beginning with an estimate that equals 100% of your current expenses and then specifically adjusting it only for those major items that you know will change.  These major items will typically include savings from the paying down of a mortgage or no longer being responsible for the college education of children or grandchildren.  On the other side, you should factor in any major additional expense such as the purchase and maintenance of a second home, and so on.  Assuming that you are good health now, the expected need for healthcare or the possible need for long-term institutional care is particularly hard to forecast we advocate including a specific probability factor for this contingency.  Some of this risk can obviously be controlled and budgeted for through supplemental health insurance or by entering a continuing care facility Long-term care insurance, unless purchased during pre-retirement years, is generally not available at an affordable price after you have reached the middle years of your retirement.


See Develop a Spending Plan for examples of how to be more specific about estimating your expenses.


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