How much is enough? It’s the question everyone asks about retirement and one of the trickiest ones to answer, not least because what might be one man’s feast is another man’s famine when it comes to post-work lifestyle.
One thing experts do agree on, though, is that it’s impossible know how much is enough until you know what you plan to spend. But there are some less-obvious considerations to consider when making this calculation, because your retirement expenditure is likely to be lower in some areas than it was during working life and higher in others.
There are plenty of free, online retirement expenses calculators to give you a kickstart on adding up what you can expect to spend in retirement. IndustrySuperfunds Australia and some of its members, including Hesta, provide such calculators, and US fund management giant Vanguard offers an unusually detailed retirement expenses worksheet that is equally applicable to Australians (its retirement income worksheet, however, is not).
If you’re a pen-and-paper kind of person, there are pre-prepared checklists of expenses you can print out, such as the one provided by BlackRock, another big US fund manager.
Of course, creating your own expenses calculator, either in a spreadsheet or on paper, is also relatively simple when it comes to the obvious costs of living, such as accommodation, food, utilities, transport and entertainment. Just be sure to consider the detail of such expenses when setting your expected expenditure; for example, will you run the airconditioner more often if you’re home during the day? Will you use more data when an employer is no longer supplying the wi-fi? Will you spend on food when no longer preparing or buying work lunches?
Speaking of data, don’t forget to include expenses that your employer may currently cover, such as your mobile phones, petrol or even your vehicle, that will fall to you once you finish work.
With a lifetime of balancing the home budget, most 60-pluses will find calculating these expenses a simple task. The trickier bit, though, is ensuring you don’t forget or underestimate the costs that may be less regular but will still crop up in retirement as they did during your working life.
Overestimate, don’t underestimate. Some money pros say the biggest mistake they see pre-retirees make is to underestimate their post-retirement expenditure.
For example, depending on whether you elect to retain your private health cover or rely on Medicare, and on whether you’re lucky enough to stay in good health or not, healthcare could eat up a bigger-than-expected chunk of your income should you require serious treatment that you don’t wish to wait to have. Meanwhile, if you do decide to stick with private health insurance, premium increases or, in the flipside, bigger excess payments should be included in your budget.
In a similar vein, your first shot at calculating your retirement expenses no doubt took into account whether you’d purchase a new vehicle at some point in the future, but the cost of servicing and even replacing parts should also be included in your calculation. Likewise, consider whether you’ll need to make home improvements or repairs, and even if your home may need modifying to accommodate a health condition, in the years to come.
Building a monthly amount into your forecast budget that you will save toward such housing and transport expenses is more sensible than hoping you’ll be able to free up a large sum at short notice should it be required in an emergency.
Overestimate, don’t underestimate, even on the smaller expenses. Some pre-retirees make grand promises to themselves about becoming better budgeters when they’re finally living on a smaller income. But it’s safer to calculate in some expenditure on treats, even if it’s a takeaway coffee every now and then, than to create an unrealistic picture of your retirement expenses.
Think about the small things that bring you enjoyment, whether it’s occasionally buying a book or magazine rather than borrowing from the library or splashing out on a more expensive birthday or Christmas gift for the grandkids. The figures don’t need to exactly mirror what you may spend – but expecting to spend little or nothing on fripperies may not be realistic.
Michael Chesworth, Starts at 60’s money expert, says he prepared himself for living on his post-retirement income by adopting his retirement budget before he actually retired. This is a clever test of whether you can manage to stick to the budget you’ve set yourself or need to rethink.
Travel doesn’t have to mean holidays. Even if you don’t plan a retirement full of cruises, it’s worth considering whether you’ll want to make longer journeys to visit family or friends once you have more time to do so. Building some expenditure into your plan for such trips is advisable if your expected income can accommodate it.
Families can be expensive! Pre-retirement is a wise time to think about whether you will want to gift money – regularly or as a one-off – to your adult children or grandchildren. This consideration could take into account any plans to downsize in the future – a move that is likely to leave you with a substantial amount of cash that you could put to any number of uses, including as a superannuation balance-booster or as a loan or gift to your kids.
Then there are the less fun costs, such as home help and funeral expenses. Although it seems a long way off right now, the cost of getting help at home – whether it’s hiring a mowing man because your knees aren’t up to the job any more or requiring more serious health-related, professional homecare – can be high. While it’s difficult to estimate the ultimate cost to you without having been assessed by MyAgedCare for government support, assuming that you won’t have to outsource any of your current activities may be too optimistic.
Similarly, even if you don’t want a big send-off, departing this Earth does come at some cost, which you may not want your children to wear. If that’s the case, it’s money that needs to be factored in to your future expenses.
Inflation is another cost that doesn’t always come to mind. You only need look at what AU$100 was worth in 1970 compared to 2017 (AU$1,134.60, if you’re interested) to know that inflation erodes the purchasing power of your income over time. Given that your retirement will probably stretch for 20 years or more, unless you purchase an inflation-proofed income product such as an annuity (which has its own, different pros and cons), inflation will have an impact on your budget.
Although inflation was sitting at 1.9 percent year-on-year in the third quarter of 2018, the average inflation rate between 1970 and 2017 was 5.3 percent, so may not always be as benign as it is currently. When you’ve calculated your other retirement expenses, a financial adviser can advise on ways to arrange your retirement income streams to best mitigate the impact of inflation.
While some expenses may go up in retirement, the good news is that others will fall. For example, the transport cost of commuting to your job, and having to purchase work attire, will be a thing of the past. Saying goodbye added cost of having to stick to popular holiday periods to travel is another welcome saving that retirement brings.
On a larger scale, most workers aim to have paid off their mortgage by the time they retire (although this is becoming less common given the high price of housing in recent years) so that will hopefully be one bill less on your expenses spreadsheet. If not, most experts advise using the years immediately prior to retirement to pay down your home loan as much as possible.
But that’s another story – one we’ll be covering at a later date!
Important information: The information provided on this website is of a general nature and for information purposes only. It does not take into account your objectives, financial situation or needs. It is not financial product advice and must not be relied upon as such. Before making any financial decision you should determine whether the information is appropriate in terms of your particular circumstances and seek advice from an independent licensed financial services professional.