5 Things Missing From Your Retirement Budget
When preparing your retirement budget, it’s sometimes hard to anticipate every expense. One of the biggest mistakes newly retired people make is underestimating how much they will spend to afford a comfortable lifestyle. They end up overspending because they miss some necessary expenses.
Underestimating expenses, or having several “one time” expenses can derail your budget and you’ll be wondering where all the money went.
Are these five things missing from your retirement budget?
Health Insurance and Medical Expenses
Health insurance can easily be left out of a budget if your employer was paying premiums or they were deducted from your paycheque when you were working. Once retired you will have to pick up the tab.
“Free” health care for Canadians only goes so far, especially for some seniors. According to a BMO Wealth report, expect to spend an average of $5,391 in out-of-pocket medical expenses every year after the age of 65.
Chronic medical conditions increase as we age. Drug plans may cover some medications, but not all.
Prescription drugs are one major cost, but there’s also things like mobility aids (canes, walkers, wheelchairs), hearing aids, health professionals such as physiotherapists, assisted living care and long-term care.
Over time, long-term care insurance premiums (if you opt for it) may rise, so it’s best to plan for it.
Vacations, Hobbies, and Recreation
You need to include money for travel and fun. Consider how your hobbies and lifestyle may change. This will change the way you spend. You need to budget more if you have expensive hobbies.
Related: 8 habits that are killing your retirement dreams
It’s easy for spending on hobbies and recreation to get out of hand. Travel may slow down over the years, but during the first 10 – 15 years or so of retirement plan on spending as much – or more – as you did before retirement. Most new retirees tend to overspend in the first few years because there’s so much they want to do.
Don’t just plan for the one nice vacation you want to take each year. Allow for those weekend jaunts and trips to see your family, too.
Don’t forget that as you get older you may want more comfortable amenities on your travels. You’re likely not up for backpacking long distances and staying at hostels any more.
If necessary, think about changes you may be willing to make that would reallocate money to this category.
New Vehicles
Your current vehicle is probably not going to last throughout your retirement.
Whether you pay cash, or finance and have a monthly payment, at some point you will have the expense of a new vehicle. Best to have a plan.
Home and Auto Repairs
Even if you think you’re done with home renovations, plans often change. You may have to retrofit you home to allow you to stay in your home as you become less mobile.
As much as we wish our home appliances would last forever, they won’t. Replacing those appliances, getting new outdoor furniture, updating your mattress and replacing computers and TVs as technology advances, will happen at some point – as will car repairs and new tires.
Have a category in your budget where you set aside a monthly amount in a savings account that you can dip into so these “unexpected” expenses don’t derail your carefully prepared budget.
Parents and children
Many couples retire with a solid retirement plan and then their children get into financial trouble. They understandably want to help out, which is fine. But, you will have to make adjustments in your budget to cover your generosity.
If you expect to be involved in caring for a parent, factor in the potential costs. A serious illness might have your parent moving in with you, or you may need to help with medical bills.
Final thoughts
Wise retirement planning involves analyzing your current expenses and anticipating all your future outlays.
I find initially the BMO wealth report of 5391$ in medical expenses per year after age 65 rather high, if you consider many seniors are only getting by with basic pensions of 15-20k per year. I though suspect that the expenses are skewed to higher amounts in the later years, so for instance age 65-74 one would expect a much smaller sum, or am I missing something. As a new senior I do not see much evidence of that kind of spending among my peers.
@tom: You’re probably right. They are probably averaging ages 65 to 100+ . Medical expenses would obviously be higher later on when you include such things as hearing aids, motorized wheelchairs and home care professionals. It’s not a bad idea to keep that in mind though for the future.
I downloaded the report, and the figure is an average of what people THINK they would spend, not an actual real figure. Quoting an exact amount is missleading i feel. It also sounds like they are assuming the average person is using private carehomes, which is not always the case. Interesting though to start a discussion.
Anyone wanting to retire MUST do a budget including all expenses to see if they have enough income to support the lifestyle they want to lead in retirement.
I’m amazed by the number of people who don’t do this and yet retire anyway.
I have 22 years of expenses tracked on Quicken so making a budget was pretty easy for me.
Of the items you note above, the new car seems to be the easiest to forget even if you track spending since those purchases are so few and far between.
@ESI Money: It sounds like you are a lot more organized than most 🙂
Often it is the “one-of” purchases that can derail a budget, such as a new vehicle, and if you plan on living in your home for the next 30 or so years there will definitely be related expenses for upgrades and repairs.
The way i got around these one time purchases is to budget so much in catagories. Which includes porttions for purchasing a car, for instance i can set aside 800$ per month for car expenses. I normally would spend half that, but the reset accumulates in a separate bank account and eventuallyit will be enough to pay for a new car. Do the same for the house repairs and others. There is your rainy day fund.
This blog is great for ideas!
I agree its these outliers that scupper plans and cause stress or disappointment not the power bill for most retirees with some savings. I am encouraging people to spend a little more before 70 on ” fun” and travel while they feel healthier. Life expectancy is increasing , not so much health span yet. Good point Marie, many allow for big trips but forget the tank of gas to go to the lake and eating out there. Medical expenses is a tough one, in Saskatchewan we have the Seniors Drug Plan at 65 but if you retire before that the group conversion plan your employer offers usually has a cap of a couple of thousand $ , a shock if used to unlimited. Even on the SDP not all is covered. Many couples go to 1 vehicle and it can be older if not relied on to commute. having said that sometimes old cars are a false economy. A $6000 engine repair shock, would have been less stress to have a slightly newer & under warranty vehicle.
A good thought provoking article. Thanks Marie.
I have used Quicken so I have a good idea of my regular annual expenses, plus I budgeted extra for medical, vacations and hobbies in retirement. I estimated lifespan and costs for items like replacement car, roof, driveway, appliances, furnace and air conditioner. Maybe I should add furniture to that. When I retire I will create a savings fund and put aside an amount annually to cover those infrequent, hard to predict, large items. I’ll keep it in a balanced mutual fund (probably Mawer 105) in my brokerage account. If something fails during a bear market I will be able to fund it from my emergency fund held in a HISA.
I think that will keep me safe and allow some growth while saving.
The “new vehicle” category is actually not a big deal for most retirees, as most see a dramatic reduction in miles travelled by car once they hit retirement. The truth is you will find that the wheels last many more years than you anticipated on purchasing. Replacing the vehicle is simpler and cheaper too – a high mileage vehicle does not matter much if you drive seldom. You can save a bundle on a used car.
You may even find that you use the car so seldom that a car sharing service it the best option.
I also find that walking is more of a thing – I seldom take my car if I am travelling under 5k. All those short hurried errands change for the better.
I view the car (and my motorcycle) for what they are – luxuries. It is easy to drop one of them and maybe both if a pinch comes
Hi Marie,
This is a really good article, thanks for bringing up these important points.
From what I see, the hard part for Canadians is determining real numbers for pre- and post-retirement. It’s not easy to figure it out yourself and most financial advisors are paid by commission and are not going to put a decent effort into accurate tracking or predicting of expenses (which is actually critical in estimating how much you need for retirement).
Your readers should look for a fee-for-service planner who is going to work with them to work out all of the details of where their money is going, and will go in retirement.
Steve