You must consider the retirement you want to be able to estimate how much it will cost.
Healthcare costs in retirement might be an unknown, but there are some numbers and projections to give you a general idea.
Creating a solid budget for retirement may get you that much closer to the retirement of your dreams.
You’ve probably been told to save for retirement your whole life, but it may not hit you until your late middle-age years that retirement is right around the corner.
This stage of life, sometimes referred to as “peri-retirement,” or the 15-20 years before you plan to retire, is when your retirement years start to go from a fuzzy image in the future to the clear picture of what you want your retirement to be. It’s also when you might need to do some catch-up funding if you’re falling short in making that vision a reality.
To ensure you’ll have enough money to cover your retirement, use a retirement budget to help you figure out where you are and what you’ll need.
What will your retirement look like?
You can’t reach a goal if you don’t know what it is. If you’re a few years away from retiring, you have some time to really think about what you want it to be. People are living longer,1 so you might have a longer retirement than you think if you retire at the traditional age of 65. These days, there are also new alternatives to that traditional retirement path, such as working longer, working part-time, or starting an independent encore career around a passion that’s been on the back burner.
If you plan to leave work altogether, what do you want to do with your time? Would you travel, do all of those hobbies you never had time for, volunteer, or go see family members?
Many of us assume that life in retirement will cost less than in our working years, but that may not be the case, depending on what kind of retirement you want. For example, you may not have transportation costs associated with going to work every day, but if you want to travel, join a lot of social groups, and go to a lot of events, your transportation and entertainment costs may actually go up.
A cost that may go down is what you were spending to raise your children, since they are most likely living independently at this point. But if you don’t have kids, you may not see much of a drop in expenses.
Retirement in phases
You might also want to think of your retirement in phases. Early retirement may mean being more active with new activities and travel (expenses may go up). Middle retirement may mean you want to slow down, stay closer to home, and take up activities such as cooking and gardening (expenses may go down). Late retirement may mean you're no longer able to be active, health conditions may become limiting, and you may need caregiver assistance (expenses may go up).
Do a rough estimate of what this new lifestyle will look like. For example, budget for early retirement by factoring in costs for plane tickets, hotels, hobby supplies, social group membership fees, entertainment costs, and vehicle maintenance costs.
The elephant in the room: healthcare costs
Most people don’t want to think about their health declining in their retirement years — and they really don’t want to think about what that will cost with today’s rising rates for medical insurance. Yes, you’ll go on Medicare at age 65, but that won’t cover everything. You’ll still have to pay for premiums as well as supplemental Medigap plans, prescriptions, dental work, vision needs, and hearing aids.2
What if your health declines to the point where you need a caregiver? How would you want to be cared for? Would you stay at home and have a family member care for you, hire a caregiver to come in, or go to a care facility such as assisted living?
Do you have long term care insurance? If not, consider looking into the cost. Otherwise, you’ll need to provide your own funding for caregiving, and that could be a considerable expense.
While it’s hard to know what healthcare will cost in the future, you can start gathering some numbers now on insurance premiums and assisted living facilities to get a general idea of what you may need. Here are a few stats to get you started:
The average couple retiring today at age 65 will need an estimated $285,000 to cover health care and medical costs in retirement (this includes Medicare premiums, part B coverage, part D drug coverage, some out-of-pocket expenses, but not long-term care).3
The average assisted living facility in the U.S. costs an estimated $4,051 per month. The average nursing home costs $7,513 per month, for a semi-private room, $8,517 for a private room.4
The average cost for an in-home caregiver is $15-$25 an hour with a minimum three to four-hour shift.5
What are your fixed expenses?
Now that you’ve taken a look at the future, let’s look at the present and how things might change as you head into your retirement years. What are your current fixed expenses? List out the bills you must pay to keep the lights on, literally, such as utilities, plus minimum debt payments, and grocery costs. Then cross off the ones you think will no longer exist when you get into retirement (such as having your car or home paid off or transportation costs for going to work.) Don’t forget to budget for home upkeep and taxes on retirement account withdrawals and property.
What money will be available to cover your retirement?
Now take a look at what you have to cover your retirement financially. Here are some places to find the money:
What do you have in your 401(k) and IRAs?
What will your Social Security payout be at your full retirement age or if you wait until age 70 to collect?
Are you expecting to receive a pension?
How long do you plan to work? Will you phase into it by switching to part-time work to keep some income coming in?
Do you have long-term care insurance to cover those costs if you need it?
Do the math
What is your current budget? You can check out our previous article on budgeting for your midlife years to help figure that out. Then add up what money there is in investments, Social Security, pensions, etc. plus what you're currently saving. Will it be enough for what you just mapped out for retirement, including healthcare?
If not, you need to be adding more. Take advantage of catch-up contributions to your 401(k) and IRA plans. Take on a side job if you need extra money to save.
You may be struggling with whether to pay for your kid’s college tuition or save for your retirement. Consider this: college tuition costs can be lowered by having your kids take on part-time work, attend in-state schools where they can live at home, take out student loans, earn scholarships, or work jobs with tuition reimbursement. Your retirement fund only has you to cover it, so you may want to make that the priority.
If you can’t quite get the numbers to work or it’s just too overwhelming to see the big picture, a financial professional can help. They may help you consolidate accounts to make it easier to see everything you have and what the gaps are. They can also show you how to adjust your strategy including how to withdraw from retirement accounts without risking running out of money and adjusting for inflation.
So think of your “peri-retirement” years as the time you can not only dream about the retirement you want but also create a solid budgeting plan to make it a reality.
Things to Consider:
What do you want your retirement to look like?
What will your expenses be for the retirement you want?
What is your current budget and are you saving enough to cover retirement?
1 “Older Americans Living Longer, Study Says,” ABC News, August 2018
2 “Your Medicare Coverage,” Medicare.gov, November 2018
3 “Here’s How Much the Average Couple Will Spend on Health Care Costs in Retirement, Money, April 2019
4 “Cost of Care,” Genworth Financial, 2019
5 “Hourly and Live-in Care Services and Rates,” CaregiverList.com, 2020
Neither Transamerica nor its agents or representatives may provide medical, tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal professionals regarding their particular situation and the concepts presented herein.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
