Mr. and Mrs. Sharma had invited the Tejwani couple home for a sumptuous lunch that fine Sunday afternoon. The white-haired, jovial 67 year-old Mr. Tejwani asked Sharma, “So, is this feast a pre-celebration of your retirement?” And his wife added, “Great! But don’t think you can escape calling us to you’re actual Retirement Party, ok!?”
The Sharmas just laughed and then told them that they actually were concerned about their retirement planning and wanted to take a leaf out of their more senior friends’ personal experience, especially on the financial front. “You were very wise Sharma, I am the right person to ask about this. It’s fun, being free and happy in retirement, with our savings put aside too, but let me caution you…there are pitfalls too…in fact, you might find your monthly expenses actually rising after you are retired!” and he went on to give them a snapshot of what to expect…
Many of us assume that our spending will reduce in retirement. No more daily commuting costs or having to maintain a work wardrobe and less eating out and less business lunches. No saving up for retirement.
Well, many retirees do find that their expenses go down, sometimes saving more than their expectation of saving about 20 – 30% per month. But others are surprised to see them heading in the opposite direction. There are 4 major reasons for this: Travel, Uncovered medical, unexpected tax bills and more free time to shop and spend.
Many of us want to travel more when we retire. Happily for you, you’ll have the leisure to go places you’ve always wanted to see but never had time for when you were working 9 to 5 and raising kids. With more time, you are tempted to take longer and more expensive vacations. Your travel expenses could easily shoot up, especially in the early years of retirement. Travel insurance, and medical insurance while travelling are additional costs.
Well, it’s possible to travel economically. In our working years, we value time more, so we don’t mind paying extra for convenience. With more time, you can save on travel financially. For example, airline tickets with more stopovers, trains, cruises are good options.
It’s essential for retirees to budget for health insurance coverage, without employers’ contributions or cover. It’s very likely that you will use more health care services and have to pay more for healthcare as you get older, so you need to factor likely health care costs into your retirement budget.
Mediclaim policies might not insure you in all cases if you get sick and need treatment. It also might not fund a number of other expenses that your previous, employer-paid health insurance probably took care of.
Your income is likely to decline during retirement, resulting in a lower tax bracket and a smaller income tax bill. But if you have a lot of money in retirement plans, you could actually find your income and income taxes going up. That’s a nice problem to have, but it can be an unexpected expense as well!
- The Cost of Extra Free Time!
Retirement often means spending more time at home. You could find yourself wondering how you ever lived with those worn carpets and old curtains, not to mention those other ancient home accessories. You might also want to splurge on an up-to-date kitchen, a more luxurious bath or a separate home office where you can manage your investments or write your dream novel.
If redecorating or renovating your home makes you happy, and if you have the budget for it, go right ahead. But do remember, retirement can last a long time, and many of us are likely to live into our 90s too. Ideally, our savings should last as long as we do.
You might also decide that it is now finally time to indulge in your hobbies and projects. In retirement you will have time to take photography or drawing classes, learn to play an instrument and buy that dream bike you had always wanted. All these activities will cost money. Does your retirement budget factor in potential hobby activities?
The Nest Egg
In sum, while the level of spending often increases initially upon retirement, it will usually decrease as people get older and do fewer activities. Health care expenses may increase in the later years, but travel and recreation expenses will usually go down. Make sure nest egg factors in all these elements.
Mr. Tejwani smiled, as he dug into his ice cream happily, “Enjoy your retirement. Take advantage of the freedom, but do keep an eye on your expenses. Set a budget and get frugal too, if needed. Happy retired life my dear friends!”