Retirement budget ... what to watch out for?

[albireo13]

I am planning retirement in a few years. We both work full time, me 61yo and DW 57yo.
Our youngest has 3 years of college left.

Children (5) are not all solidly independent but, in a few years they should be (hah!).

Our runtime budget right now is somewhat high. Still helping kids somewhat and still saving for college.

I'm also putting together a projected retirement budget but, worry about missing something. I'm budget $1500+ a month for health insurance before 65yo.

What are the pitfalls? Would love to hear from the experienced.

Thanks.

 

[MichaelB]

You might find this thread helpful http://www.early-retirement.org/for...-answer-before-asking-can-i-retire-69999.html

 

[DEC-1982]

Fidelity Retirement Income Planner (RIP) estimates the current budget for medical, dental and vision at $2086 for the two of us currently.

The surprise for me was the medical cost estimate jumped from $1100 in May 2015 to $1750 in May 2017. On the other hand healthcare inflation dropped from 7 to 5.5%. All numbers from RIP. All this makes you wonder whether planning for 40 years is just a wild guess.

 

[candrew]

Pitfalls?

Focusing singularly on the money and numbers aspect of retirement. Of equal importance - giving serious thought to the resultant increase in leisure (non-w*rk) time, creative pursuits, physical well-being, mental well-being, and solid social support.

If you haven't yet, consider having a read of Ernie Zelinski's book, "How to Retire Happy, Wild and Free".

 

[DrRoy]

Also allow for medical expenses beyond the insurance premium. How about car replacement? Taxes? Allowance for the unexpected?

 

[Blue Collar Guy]

Dont worry, from the sounds of it you wont retire much before 65 anyway. Just price out the premiums for your wife.

 

[albireo13]

Yeah, I'll probably be 64 when I retire. I won't feel comfortable retiring until our youngest is out of college (BS at least). If he wants grad school that will have to be on him.

I'm budgeting a few $K for dental, a few $K for medical, and about $5K misc (unforeseen) per year. Most likely, a car or two will die and we may end up with a car loan or two.
I'll budget for monthly car payments ($250) and if not, that will go into our misc. fund.
We like to buy used.

 

[W2R]

My dental expenses really skyrocketed about four years ago as I entered my late 60's, and this can happen if you have bad teeth like I do. My teeth finally gave out I guess. That was the biggest unexpected expense for me, maybe $5K-$10K extra per year depending on how many implants and root canals I needed each year. Of course, you can get bridges instead of implants and they are much cheaper, or you can just have the teeth pulled and not have those teeth, but I wanted implants.

If travel is important in your vision of retirement, be sure to budget an adequate amount for travel. We would rather not travel, but are floored by the costs of trips that some forum members mention.

 

[Scuba]

We used our pre-ER spending, which we had tracked for years in detail, as a starting point. Added money for more travel, entertainment and healthcare costs. Reduced commuting costs, car maintenance and insurance, dry cleaning and other costs that resulted from working. I think the Fidelity RIP tool is very helpful. I also recommend including a healthy amount for contingency.

 

[Midpack]

Many retirees miss or underestimate the large, non-annual expenses like major home repairs/remodels/system-appliance replacements, car purchases, or a host of others. We did budget for "other" ("contingency," "accrual") and after 6 years of experience, our "other" amounts to about 20% of our total spending and (as expected) it fluctuates way more from year to year as compared to all the traditional expenses.

 

[brett]

Looking back I would say one think to keep in mind is how you anticipate your lifestyle will change. Will you downsize, move to a higher or lower cost area, rent instead of buy, travel aspirations, etc? Or, it you may be quite happy with your lifestyle in which case budgeting should be fairly straightforward. We are fortunate inasmuch as healthcare costs are not an issue for us. Cannot imagine trying to come up with a realistic budget for future costs. We recently bought a home after four years of renting. In the past we reno'd three homes. This is almost new and did not even require paint. We assume that each appliance has a seven year life span and budget accordingly. Same approach for the other expensive components-furnace, roofing, etc.

We made some significant changes that I have no doubt left some relatives/friends wondering why. The budget worked out the same but the basket of goods so to speak was very different.

The great thing about retirement is that if can be a blank page for you to fill out. All those things you wanted to do but did not or places you wanted to go but have not yet been. I think one of the keys it to do what you want to do. Forget about what others may think or if it does not align with the traditional view of retirement.

Try to budget for it. Then add ten points for just in case.

 

[Nature Lover]

Many retirees miss or underestimate the large, non-annual expenses like major home repairs/remodels/system-appliance replacements, car purchases, or a host of others. We did budget for "other" ("contingency," "accrual") and after 6 years of experience, our "other" amounts to about 20% of our total spending and (as expected) it fluctuates way more from year to year as compared to all the traditional expenses.

+1 I'm only retired two years, but I've been setting aside additional cash equal to ~20% of other living expenses, in order to ensure I am prepared for larger periodic and/or unexpected expenses. Turns out the 20% amount is lining up to be about what I think will provide the funds and safety net that I want going forward.

NL

 

[CaptTom]

I'm going to go be a contrarian. Consider the possibility that you might OVER-estimate some expenses.

It's natural to be conservative in your budgeting. That's good, and it may help with that "unexpected" category.

But if it keeps you in OMY mode too long, you might be losing something far more precious than money - your time.

 

[Koolau]

One thing affecting us has been drug costs. My old (megacorp subsidized) medical plan (coordinating with MC) was quite generous. Megacorp changed the plan and simply gave us money to find our own (Medicare pt. D or an enhanced Medicare supplement with a drug benefit.) Neither option was as generous as Megacorps original plan and our drug costs spiraled just as the drug companies raised all their prices. Between DW and I, we eventually told our docs that we had to find something cheaper. In my case, one drug cost $12/day even with the insurance benefit. The doc relented and let me use an over the counter med which cost $.03. Now, had he or I thought this was life or death, I'd have gladly paid the $12. You might want to prepare for such surprises because things can change just that quickly. Much of health care (and especially its costs) are outside our control. YMMV

 

[Senator]

Estimated taxes... They are no fun.

 

[FIREd]

Many retirees miss or underestimate the large, non-annual expenses like major home repairs/remodels/system-appliance replacements, car purchases, or a host of others. We did budget for "other" ("contingency," "accrual") and after 6 years of experience, our "other" amounts to about 20% of our total spending and (as expected) it fluctuates way more from year to year as compared to all the traditional expenses.

+1

This year we have been hit hard with large, unexpected dental, vet, and home repair expenses. A full 23% of our budget is allocated to cover those contingencies every year - as well as car repairs, car replacement, and out-of-pocket medical expenses. Those are the kind of expenses where nasty surprises can arise. The rest of our budget consists of monthly bills (pretty stable from month to month, so few surprises here) and discretionary spending (any overspending in that category would be due to our own negligence).

 

[OHjosh]

The estimate for cost of healthcare blows me away. I am 62 and my COBRA runs out 3/18. I only estimated $1K for the gap period and thought I was being conservative. (I am a naturopathic guy and I can afford a large out of pocket.) After Medicare, would it still be $1.5K per month?

In my estimate I also put in $15K for house painting and a roof next year, then put in my monthly mortgage payment going forward for unknowns on the house. Too little?

 

[Teacher Terry]

We completely fixed or replaced major things in our house before retiring. We also bought 2 cars. Unfortunately we have spent close to 50k for dental expenses which I did not anticipate. WE lost 3 good friends between 59 and 67 so are traveling a lot now while we can.

 

[walkinwood]

Good points above. Here's my contribution
Lifestyle creep is your biggest risk. What are you going to do with all the time you now have? Will you fill it with activities and toys that cost a lot of money, that incur monthly subscriptions? Those are things that will destroy your retirement.

Good luck.

 

[Sunset]

One thing affecting us has been drug costs. ..... Between DW and I, we eventually told our docs that we had to find something cheaper. In my case, one drug cost $12/day even with the insurance benefit. The doc relented and let me use an over the counter med which cost $.03. Now, had he or I thought this was life or death, I'd have gladly paid the $12. ....

Why would a doc care if you were using a low cost drug or the expensive one, unless he was one of those doctors that gets a kickback reward from the drug company for the number of patients he has on the expensive drug.

Whenever I start/try a new drug, I tell the doc I want the cheapest one, like a generic as maybe it will be fine, and generic ones have stood the test of time meaning you won't find out 4 years later that they kill x% of patients, (I'm looking at you Celebrex).

 

[Sandy & Shirley]

Estimated taxes... They are no fun.

We have posted this many times on this site. Avoid the 25% federal tax bracket like it is the plague!

Look at what you expect your lifestyle will cost and where that money will come from now. If those income sources will push you into the 25% bracket, think about doing a few Roth Conversions at your current tax rate to move some of your taxable IRA savings into non-taxable Roth.

The 25% bracket is a huge problem during retirement because of the 1993 legislation that makes 85% of your Social Security benefits taxable as your other income increases. When you are in the 25% bracket and get an extra $100 from a taxable source, that will also cause an additional $85 of your Social Security to become taxable, so your taxable income will increase $185 and 25% of that is $46.25. You got $100 of extra income and paid $46.25 to the IRS, which is a “marginal tax rate” of 46.25%.

I won’t go into the details, but if some of your income is coming from non-IRA investment which create LTCG or qualified dividends, your marginal rate can grow to 55.5%.



These are not the rates that millionaires pay. These rates are paid by single individuals with gross retirement incomes as low as $50,000. Married couples have similar problems.


You can search for my other posts if you want more details, but the bottom line is to look at your taxes early each year and avoid the 25% federal bracket at all costs!

 

[bingybear]

Look at your tax budget longer term and plan. Understand the short term blips and the longer lived increase rates. For instance the added tax on SS noted above (this is not as short lived as many). But if your RMDs will always put you over this, then little can be done other than proper charitable giving.
Consider what moves will help you longer term: roth conversions, LTCL harvesting, LTCG harvesting, HSA funding (before medicare).

The other thing is look at how your AA is positioned. What investments are in what accounts and how does this work with your withdraw strategy and tax planning.

Also, do you need more credit, different credit... do it while you are working and have a good income. It is easier to qualify. If you need HELOC, get it before you retire.

Figure out what your are going to do in retirement. How much social interaction do you need and where will you get it? There is a lot of social in work.

Exercise! very important for staying health! what are you going to do!

What common things will you do with your spouse.. and what will you do separately. Will the new together time be too much or not enough. Be aware you may be resetting some parts of your relationship. This change is like getting a new job, moving house, having a kid. It can be stressful.

 

[gretah]

Like others, I've been facing unexpected dental costs in my 60s, too.

A root canal and a crown (for which I paid $3K last decade) both failed. Now I'm getting implants.

I looked into the Baja Calif Mexican town that does lots of dental work for Americans and Canadians: Los Algodones. Seems their implants have a 10% failure rate compared to US 3% failure rate - fyi. So, no thanks to Mexico.

 

[WestUniversity]

Many retirees miss or underestimate the large, non-annual expenses like major home repairs/remodels/system-appliance replacements, car purchases, or a host of others. We did budget for "other" ("contingency," "accrual") and after 6 years of experience, our "other" amounts to about 20% of our total spending and (as expected) it fluctuates way more from year to year as compared to all the traditional expenses.

We used our pre-ER spending, which we had tracked for years in detail, as a starting point. Added money for more travel, entertainment and healthcare costs. Reduced commuting costs, car maintenance and insurance, dry cleaning and other costs that resulted from working. I think the Fidelity RIP tool is very helpful. I also recommend including a healthy amount for contingency.

I did much of the same. Tracked historical spending for everything and then adjusted for current expenses that will go away upon FIRE...

 

[Teacher Terry]

Gretyaa, I went to Kansas for my implants as they were a 4th of what I would have paid in NV. COL is much lower there including dental, vet and medical expenses. I knew that because I used to live there.