One of the big problems about working out how much retirement income you will have to spend is what your living expenses are likely to be.
Future costs are a real problem to nail down, especially when no one knows how inflation may affect them.
Take a recent survey pitched to more than a thousand Americans aged 50 or more that asked them to predict their living costs after retirement.
The result highlights the confusion – and many other surveys have echoed the results.
Although 44% of workers aged 50 or over believe their living expenses will stay the same once they retire, 34% expect them to go down, while 22% are waiting for them to go up.
What you may have to spend
So, who is right?
The answer is no one knows because too many variables apply.
- Many bills will probably stay the same – like the day to day spending we all have and will continue to incur, such as council tax, heating and food.
- Some costs will go down – these are the ones related to work, like travel and clothes. Two car families will probably find they can get past with one after retirement.
- If you have paid off your mortgage and other debts, this will free up some cash as well.
- Other expenses will go up. Money spent on hobbies and holidays is discretionary, but you need to do something to fill all that time.
- Costs that you might have to consider include the running costs of your car and replacing the vehicle at some time.
- As you age, you may have to factor in care costs and maybe help around the house and garden.
After considering these points and others that may apply to you, you should look at some other key data as well. Ask yourself some tough questions to benchmark your retirement spending:
- When will you retire, and will you continue to work part time to supplement your income?
- What is your health like and are you likely to enjoy a long and active retirement?
- Will you carry debts into retirement?
- When will you start to pick up the state pension and any other pensions?
A range of surveys suggest that you will need around 80% of your working income in retirement and living costs won’t fall much once you give up work.
What’s more frightening is when working out your retirement cash projections, 46% of people said their expenses went up in the firsts two years of retirement – and for one in three that continued for six years.