By FPA member Jeanne Gibson Sullivan, CFP®

Last Updated: April 25, 2011 

To assess if your savings and income sources in retirement will be enough to support you, first it is important to know how much you plan to spend. It is commonly suggested that individuals in retirement will spend 70-80 percent of the amount they are spending while working. But is this an accurate projection? As is often the case, the answer is — it depends. Some expenses might go down in retirement, while others may increase. Here are some simple steps to help you determine your expenses in retirement.

Step 1: Know Your Current Expenses
The starting point for your retirement budget is your current expenses. Have a written budget which details all of your current monthly expenses, including provisions for items that occur less frequently, such as home and car repairs.

Step 2: What Changes Will You Make in Retirement?
Some people make big changes in retirement – such as selling a house and moving. Develop an estimate of the financial impact of those decisions.

Step 3: Assess What Expenses Will End
The mortgage payment is the most common expense that may end either before retirement or shortly after retirement. 

Step 4: What Expenses Will Decrease?
Some of your current expenses may be deducted from your paycheck now and will stop when you retire, such as disability insurance and life insurance (if through your employer). Assess whether such coverage is still needed and can be obtained privately, likely at a higher cost. Costs related to your job, which are not likely to stay in your budget, include transportation to and from work, parking, work clothes and meals at work.

Step 5: What Expenses May Increase?
Health care costs typically increase in retirement. For those who retire prior to age 65 (the age of Medicare eligibility) without continued coverage from work, health insurance costs could increase dramatically for a number of years. Even with Medicare coverage, health care costs are typically a significant budget item for retirees, especially if any type of assistance or long-term care is needed. The annual Retiree Health Care Costs Estimate survey by Fidelity Investments projects that for a 65 year old couple retiring in 2011 with no work covered health plan, health costs throughout the remainder of their lives will be $230,000.

Step 6: What About More Spending on Fun?
Many people have more time when they retire and want to increase their leisure activities, such as travel or hobbies. Often these leisure activities are expensive.

Step 7: Prepare for the Unexpected
Cars and homes will still need to be repaired and cars will still need to be replaced. 

So start with your current expenses and adjust up or down based on your own circumstances. Many costs are difficult to accurately predict, yet develop estimates as best you can. Include provisions for emergencies and irregular expenses. This will give you a solid projection of your retirement budget. Be sure to keep it updated as your plans evolve. Then, the next step is to determine if your sources of income and savings will be enough to cover those expenses in retirement.

FPA member Jeanne Gibson Sullivan, CFP®, is a financial planner and owner of her own financial planning practice, Financially in Tune, in Wakefield, MA.