- 1). Write down your anticipated housing expenses. If you are a homeowner, your retirement housing expense will consist of your monthly mortgage payment, assuming you have not paid off your mortgage. If you intend to rent, project where you will live, the average monthly rent in that area, and how much you would be willing to pay. Using these factors, estimate your monthly rental expense. Do you intend to live in a retirement community? Review their current expenses and estimate their future annual costs.
- 2). Now calculate your average annual utility expenses. If you have dependents in your household who will not live with you during your retirement, estimate their usage and prorate your projected utility expense accordingly.
- 3). If you have health insurance and intend to work through retirement, investigate how much the average insurance premium is for a senior citizen under your current plan. If you do not intend to work, review the official Medicare website, http://www.medicare.gov/, and determine your likely premiums. The key here is to assess whether you think health care costs will rise or fall by the time you retire, and by how much. You can begin your assessments by obtaining government projections from the Congressional Budget Office (see Resources links below), and an analysis of those projections from your local newspaper, as well as assessments from think-tanks, such as the Cato Institute and the Center for American Progress. From the information derived from these and other similarly relevant resources, make an estimate of your likely health care costs.
- 4). Review your current spending on food, clothing, and transportation. Will you spend as much in retirement on these items? Remove dependents from your estimate of your future food and clothing expenses, and figure out whether or not your own spending on these items will increase or decrease during retirement.
- 5). How do you envision spending your retirement years? Traveling, golfing, or enjoying similar leisure activities? Create an annual recreational budget.
- 6). Reviewing your annual budget, and/or your bank statements, estimate the future costs of any other necessary expenses, such as life insurance.
- 7). Now estimate your future tax liability. Review your current retirement savings, and your annual rate of retirement savings. Check to see if your retirement plan provider provides retirement income projections based on current rates of saving and projected rates of return on their website. If not, call your plan provider's financial representative or your own financial adviser, and ask for a projection.
Add your projected Social Security income to your projected retirement savings, as well as any other income from assets in non-retirement accounts, such as rental property. You can estimate your Social Security income using the retirement estimator on their website (click the link in Resources below).
If you intend to work during retirement, add your likely income.
Check the IRS website and determine which tax bracket you would be in now if you made your projected retirement income today. Using that information, assess for yourself whether tax rates will rise or fall by the time you retire. You can do this by reading think tank analyses of future tax rates and relevant policies on the Cato Institute's website or the Center for American Progress website, among others as well as on personal finance websites, such as CNN Money (http://www.money.com), and financial publications such as The Wall Street Journal (http://www.wsj.com).
Using your projection, estimate your future tax liability. - 8). Add all of these expenses together. You now have an estimate of your retirement expenses.
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