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If you know what your annual income is today, you can start the planning process by assuming you'll spend about 80% of the income you will be making before you retire every year in your retirement-that's known as your retirement income replacement ratio. We recognize that, so we've taken the approach of looking at what people can generally afford in retirement based on their preretirement income. Many simply don't do any budgeting at all-not even trying the "back of the envelope" method. "Fortunately, many people who have saved adequately for retirement can fulfill their dreams because their overall expenses are generally reduced in retirement save one important category-health care." The 80% rule provides a guideline of what you can afford in retirementįor many people, budgeting and estimating future spending is something that they find difficult and tedious.
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"When estimating the cost of retirement lifestyles, most people seek to maintain their standard of living, which generally peaks in your late 40s to mid-50s," says Steve Feinschreiber, senior vice president of Financial Solutions at Fidelity. Then you can turn your "guestimate" of retirement expenses into a detailed retirement income plan either on your own or with an advisor. How will you really know the extent of all these expenses before you enter retirement? The good news is this task gets easier the closer you get to retirement if you've already created a retirement budget and explored what your lifestyle will be like in retirement.
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Some of your expenses will go down, but others may actually go up. One of the biggest and most baffling questions you'll likely face is determining what kind of a retirement lifestyle you can actually afford. Hopefully, new adventures and new activities await you.īut remember, as you redefine your retirement, consider your retirement income plan, mapping it to a budget based on what you expect to spend-or can afford to spend-category by category throughout your retirement. You may be planning an encore career or looking to maximize opportunities to travel. If you're like many people, you don't buy into the traditional definition of retirement. As you near retirement, consider working with an advisor to fine-tune your budget and retirement income plan.Expect 15% of your living expenses to be related to health care expenses after you retire, year in and year out.If you plan an active lifestyle in retirement, expect to ratchet up your annual retirement budget by 6 percentage points compared with a less active lifestyle.If you know your annual income while you're still working, expect to spend between 55% and 80% of that every year throughout retirement, depending on your income, retirement lifestyle, and health care costs.