9 Replies Latest reply on Jun 4, 2011 4:33 PM by JerryD

    Estimating retirement expenses

    Chrysalis

      I am trying to estimate how much income we will NEED (as opposed to want) in retirement. Since our lifestyle is already fairly modest, I don't see any expenses that will be significantly lower after retirement than they are now. We will have no commuting costs (maybe only one car) and no lunches in the company cafeteria, but that's about it. Our basic expenses (housing, utilities, food, transportation, entertainment, charity, etc) will stay the same, won't they? On the other hand, our medical expenses may go way up (medical costs after retirement are a total black box to me).

      Have you found a significant difference (up or down) in your post-retirement income needs? 

        • Re: Estimating retirement expenses
          JerryD
          Are your medical expenses paid now? Currently with Medicare, BCBS supplemental and a basic drug Part D I expect $250/person once on Medicare. Any major drug costs will add. Travel could be a big expense depending on your tastes. For instance, I expect a 3 week road trip to and up the East Coast to break $5000 and that's with only a few days in big cities like DC, NYC and Boston which are very expensive. How often do you dine out? That's more expensive and potentially much more expensive than eating at home. What about entertainment? We volunteer at an arts center, see top notch entertainers and it costs us the gas to drive there and occasionally a modest eating out cost due to scheduling. The 25+ dates we volunteer at could easily cost $60-100 per event.

          Your clothes, car, etc. probably don't need many upgrades (either due to necessity or vanity) which reduces those costs. Try keeping your car for at least 100,000 miles and 10 years since they easily last that long now with very little maintenance. However, things grow old and that includes the house which can raise big costs if not planned for.

          There are good things too. Some states give you a break on Social Security, real estate evaluations/taxes, retirement income, etc. Your income may go down which helps on income taxes but be careful since mandatory retirement fund distributions may surprise you and cost big taxes. One thing we are doing is converting IRA's to Roth's but only up to an amount where paying taxes is out of savings and capped at  our chosen lower marginal rate. This will reduce the tax rate at least 10% for a few years due to reduced mandatory distributions and insure that those funds are always available at zero tax when and if needed else they are a potential inheritance.

          You need to investigate all of these and work up a retirement budget. A spreadsheet is tops for this what-iffing.
            • Re: Estimating retirement expenses
              jkom51

              We've been retired together since Jan 2010. Totally agree with Jerry re travel expenses. People forget, if you weren't able to afford a month's vacation for two when you were working, it's going to be just as expensive if not more so, when you're retired. Some folks love the RV lifestyle, but it isn't for everyone, and with the high cost of gas promising to go even higher (the US pays so much less than the rest of the world; it's about time we woke up to this), a lot of RVs are now just sitting around, parked in driveways.

              We took a road trip in late 2010 to the Pacific NW and in rural areas it ran $150-200/daily with moderately priced hotels. In Seattle and Portland it jumped to $300-350/daily. We live in the San Francisco Bay Area, where people from all over the world come to visit, and when we do driving trips in the Wine Country or Monterey, even using moderate-level hotels, our costs run $350-400+/daily.

              Having not traveled much before, we did have clothing costs to change our wardrobe from bus/casual to lots of Polarfleece and clothes that could take being folded up and smushed in a suitcase. New hiking shoes and Teva sandals - REI Co-op loved us that year, LOL, along with collapsible walking stick, custom maps and a GPS unit. Carry-on water filters (the public tap water in New Mexico was pretty disgusting until we got up into the mountains in Taos).

              Don't underestimate how much car maintenance costs and home repairs will rise in the future, even short-term. On our 2003 Hyundai, when we bought it the 75K major tune-up was $850. By the time the 75K was actually reached on the odometer, the cost of that appt was $1100 and another $375 for the timing belt, and the sales tax had jumped to over 10%.

              Can't help you with medical; we belong to an HMO with its own pharmacy, so co-pays are fairly modest.

                • Re: Estimating retirement expenses
                  JerryD
                  jkom51 said...

                       
                            

                  ... Some folks love the RV lifestyle, but it isn't for everyone, and with the high cost of gas promising to go even higher (the US pays so much less than the rest of the world; it's about time we woke up to this), a lot of RVs are now just sitting around, parked in driveways.

                  ...

                  Don't underestimate how much car maintenance costs and home repairs will rise in the future, even short-term. On our 2003 Hyundai, when we bought it the 75K major tune-up was $850. By the time the 75K was actually reached on the odometer, the cost of that appt was $1100 and another $375 for the timing belt, and the sales tax had jumped to over 10%.

                  ...

                  Discovered a few years after we bought our 1st RV (used the F in L's til then) that it is expensive to pull one. After letting it sit in a paid lot for a few years, we finally decided to just go find a very nice place and get an annual slot. LOVE IT! The annual fee is easily covered by just a couple of on-the-road trips and the associated high gas costs (the pulling vehicle can easily drop 1/3 or more mileage when towing). Everything is pretty much ready to go. Buy some groceries, turn on the utilities, open the door and settle in. When we moved to AR it sat again for a few years until we remembered that an old friend and customer from 20 years ago owned a resort. Now we parked the RV there. Only takes 2-2.5 hours to get there and shop then have fun. We even replaced the old RV with one the 2nd resort owner was selling for a fraction of the cost of a new one and it was also in good shape since he is one of those perfectionist, do-it-all's (definitely NOT me).

                  You touch on a very good point about Asian cars - timing belts! My Buick Le Sabre doesn't require much maintenance other than oil, oil and air filters, tires, battery, coolant change until 100,000 miles and it all is pretty low cost. I have also found that higher end Asian cars can have a timing chain with no replacement at around 75,000 miles. My point is to do a bit of education before buying with the idea that you want minimal maintenance for at least 10 years and 100,000 miles. Throw in a $1000 or $2000 on top of the price of the car new, divide by 10 and that is the way I figure the cost of a car per year when I assume it is pretty much worthless after 10 years.
                • Re: Estimating retirement expenses
                  Chrysalis

                  Hi, JerryD-

                  Thank you for the great info! You bring up some excellent points for us to consider. I did check our county real estate tax situation. In my county, there is a "senior exemption" but not unless and until you completely stop working (well, they allow $10,000/yr of earned income, which is not much). Since I plan to continue working part-time for a long time (I am self-employed and can pick and choose my hours), that probably won't kick in for us for many years.

                  However, I don't understand your statement, "One thing we are doing is converting IRA's to Roth's but only up to an amount where paying taxes is out of savings and capped at  our chosen lower marginal rate." Could you explain a little more about how you decide how much to move into a Roth?

                  Thanks again!

                    • Re: Estimating retirement expenses
                      JerryD
                      Crysalis, any (before tax) IRA to Roth conversion results in income that is taxable in the year you convert .One gotcha, you must convert before 12/31 to include in taxes due 4/15 and potentially a quarterly estimated tax by 1/15 to avoid interest and penalties. I'll explain what this means in a bit. Depending on your deductions and personal exemptions, the resulting income up to a given amount is taxable at a maximum marginal rate. Since we use the standard deduction and know our exemptions (one per spouse plus another $1100, I think, for any at or over 65) it is easier than if you have mortgage, medical, etc. that complicate the deduction calculation.

                      Lets take an example in 2010 with a desire to not pay any more than 15% Federal taxes due to an IRA to Roth conversion. You need to add up all your income (Social Security, interest, investment, etc.) subtract your deductions and exemptions and then insure that the resulting net and taxable income is less than $68,000. Do remember to take into account any state taxes due to this conversion (AR insisted for a number of years that it wasn't taxable even though I pointed out that the Feds said it is - finally a senior auditor said oh yes it is and this cost me a nasty catch up state tax one year).

                      The point about doing the conversion by 12/31 means you need to compute your taxes by then to insure that you don't convert more than you want to pay taxes on and also to see if you owe estimated 4th quarter taxes to the Feds and the state. Whereas this may all sound just too complicated, it's not really that bad if for $59.95 you get an early version of TurboTax around Thanksgiving or very early December. This allows you to easily enter the income (Internet accessible accounts are great for tracking this and interest), deductions, etc and come up with the maximum conversion to stay below your max target tax rate. It also gives you time to tell your IRA holder what to convert to a Roth. Note that in AR, they allow both me and my spouse to have $6,000 each for a total of $12,000 of retirement income tax free, so that helps on the state side.

                      If you still think that this exercise is too much, I have a spreadsheet that says that this exercise can keep your marginal tax rate at 15% instead of 25% for several years after mandatory distributions start. In addition, you can have a very nice Roth account that is never taxable again, to either you or those that inherit the Roth's (which they can then stretch payments out over their lifetime with the associated decades long tax free growth).

                      Just to see an upper limit example of this strategy, imagine if you start doing this at around 60-62. For discussion, assume that you are fortunate enough to have IRA's between you and your spouse that allow it. Then between 62, say, and 69 or 70 (depending on when you reach 70 1/2 which means you must take the mandatory distribution that year), it easily possible to convert $50k+ per year or between $350-400k or more to Roth's at a 15% tax rate. At 70 1/2 this means that none of that as well as any investment gains is ever subject distributions and thus Fed and state income taxes. Mandatory distributions start at 3.6% at 70 1/2 and reach 6.8% by 85. In this example, that would mean from at least $13k the 1st year and at least $24k at 85 would NOT be taxable due to distribution avoidance. This is HUGE!

                      You need to what-if your specific situation!

                        • Re: Estimating retirement expenses
                          Chrysalis

                          Hi, JerryD.

                          I think I understand now. Thanks!

                          Frankly, I've always been a little confused about the pros and cons of Roths. But what you suggest makes sense. As a matter of fact, Dinkytown.net has an interactive calculator called "Roth IRA Conversion". I just tried that and the Dinkytown analysis said: "Your retirement total savings, after taxes, would increase $11,519 by converting your existing IRA to a Roth IRA." Pretty cool! Now I'll play with it some more, trying the gradual conversion method you suggest. Thanks again!

                            • Re: Estimating retirement expenses
                              Chrysalis

                              Thank you all for your excellent adivce. It sounds like the bottom line is that our expenses during retirement will be approximately what they are now except for the fact that we will need to add the cost of some type of health insurance with it's premiums and co-pays. 

                              We could lower our expenses by downsizing, moving to a less expensive area,  paying lower real estate taxes, and being more frugal in terms of buying clothes, eating out, volunteering at local theaters, etc. On the other hand, we could increase our expenses during retirement if we plan to travel a lot. Travel is more expensive than we may realize. However, there are ways to lower travel costs, too (RVs, shorter trips, group rates, etc). 

                              The only NECESSARY expense that is likely to increase during retirement is health insurance.So that's great. That's what I needed to know. I think what I'll do now is estimate our retirement income as best I can (SS, 401k, and part-time work) and try living on that NOW. See how it goes. That will give me a good indication about what lifestyle we can afford, and whether the 401k distributions we're planning to take will be enough. Thanks, everyone!

                                • Re: Estimating retirement expenses
                                  jkom51
                                  If you have not factored in inflation, make sure you do so. It is sure to return eventually, and an average 3% inflation rate will cut your buying power in half before three decades.
                                    • Re: Estimating retirement expenses
                                      JerryD
                                      Just read in several places that the longer term inflation rate (50 years as I recall) is actually 4%. I was startled that it is that high over the long term. I use 3.5% in my rest-of-my-life financial spreadsheet.
                                       
                                      Totally agree with jkom51about the long term effects of inflation. Using the Rule of 72 (divide 72 by rate to get years to double original amount), 3%  will half the value of your money (make same thing cost twice as much) in 24 years and 4% will do that to you in 18 years.