It could leave you very short on funds.
It can be tricky to know what to expect from retirement until that phase of life actually kicks off. But one common line of thinking among pre-retirees is that once they stop working, their spending will shrink dramatically.
I’m here to tell you that’s a big myth. And the sooner you recognize that, the sooner you can plan for it.
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Don’t assume your spending will decrease substantially
A lot of people think they’ll spend much less in retirement than during their working years. The reality? Your spending may not decline all that much.
Think about the expenses you incur in the course of going to work. You might pay to put gas in your car and cover a handful of tolls. Or maybe you pay for parking, or for a monthly public transit pass.
You might also have certain incidentals to cover that come with working — things like dry cleaning bills or the cost of lunch with your colleagues a few days a week. And yes, those expenses, coupled with the cost of commuting, could add up.
But when you think about the shift from working to not working, the only real expenses that might go away are those associated with having a job. So yes, you can deduct those costs from your retirement budget, since you won’t need to cover them. But where does that leave you?
Unless you have a horrendously expensive commute, you may find that not working doesn’t reduce your spending all that much. If anything, you may find that some of your bills increase due to not having a job to report to.
If you’re home during the day instead of at the office, your utility bills might rise. If you need stuff to do, you might spend more on entertainment. The list could go on and on.
Of course, if you’re someone who’s been saving a lot of money for retirement, another big expense you won’t have to face once you’re no longer working is contributions to an IRA or 401(k). You don’t have to save for retirement once you’re in retirement.
But all told, you may end up needing more retirement income than expected. So it’s important to really crunch the numbers ahead of time.
Have a realistic retirement budget
A lot of people buy into the myth that their spending will be cut in half, or something along those lines, once they stop working. Instead of assuming, do some calculations.
Figure out what you spend on your various expenses now, and then subtract the ones that will go away once you retire. If your monthly train pass costs $300 and your typical monthly retirement plan contribution is $500, you can comfortably subtract $800 from your monthly budget. But that may be all you can subtract.
Of course, if you’re willing to change your lifestyle, that’s a different conversation. But if you want to maintain your standard of living, understand how much it costs to do that now, and then subtract the appropriate amount.
You may find that the number you land on is larger than expected. And you’re better off finding that out before you retire than after.