The ability to maintain your lifestyle in retirement in a satisfying and fulfilling way is one of the biggest concerns for pre-retirees. The key to achieving financial comfort in retirement is to have a clear understanding of your financial resources and the demands on these resources both now and in the future.
Consider the following five steps to help create peace of mind during your retirement years.
Create a cash flow blueprint. A common rule of thumb when creating a retirement budget is assuming you will need 70 to 80 percent of your pre-retirement income. However, this assumption fails to illustrate what you really spend and how your spending may change over time. To get a realistic picture of what you will likely spend in retirement, you should create a budget based on your current spending habits. There are many free or low-cost online resources available that help you automate expense tracking, like Mint.com and Quicken.
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Next, you should think about expenses that will change over time, such as travel and entertainment expenses, as well as non-recurring expenses like car purchases or home maintenance projects. Taxes are also important to consider when budgeting, especially for high-net-worth individuals. Income taxes tend to decrease early in retirement, but often rise significantly when it comes time to take required minimum distributions from their retirement accounts.
Plan for higher health care costs. A common misconception among retirees is that Medicare will cover most health care costs during retirement. While Medicare is designed to cover many health-related expenses, it does not cover long-term care costs (nor other smaller expenses like dental care or hearing aids). A prolonged health event could significantly derail your retirement plan.
It is important to run scenarios to understand the impact a prolonged negative health event could have on your retirement savings. Consider long-term care insurance to protect against a prolonged health event. Remember, the earlier you purchase long-term care insurance, the more likely you are to qualify at a lower cost.