Sources of Retirement Expenses

Many of your strategic and investment decisions will hinge on the projected difference between the amount of money you think you'll have available in your retirement years (assuming you changed nothing today), and the cost of those retirement years.

First, you need to develop a clear vision of what you want your retirement to look like. Second, you have to estimate how much money it will take to make that vision come to life. Herein lies one of the challenges of retirement planning: the importance of predicting the future. Factors like Social Security, corporate pension plans, food and housing needs must all be taken into account and the unexpected must be accounted for.

As a general rule:

• Your total annual expenses in retirement will likely range from 70% to 90% of your current annual after-tax income. This is a result of:

• Your home mortgage is likely to be paid off, or you may move into a smaller home;
• Expenses for your children are likely to decrease (such as college education);
• Health care costs will rise and so may your need for medical and/or long-term care;
• Most life insurance policies are paid up by age 65, and cash value policies actually start paying money back to you;
• Leisure and travel costs may increase, at least in the early years.