Setting Goals

Setting Goals

First, draft a budget to figure out how much money you'll need monthly in retirement. Easier said than done? Not really. Here's what you should consider:

Your major expenses will be for housing and medical care. Of course, you'll also require other necessities like food, clothing, transportation and household items. With necessities, the question is one of quality rather than quantity. Do you have your heart set on owning your own home or would you be happy renting or living in your children's spare room? Do you want to continue to own and drive your own car or are you willing to consider public transportation or the help of your children or friends?

Your optional expenses also significantly impact the quality of your life in retirement. Optional expenses include travel, entertainment, hobbies, gift-giving and leaving an inheritance. Can you enjoy retirement if you only visit places within one day's driving distance? Do you want to buy the grandchildren great presents at the holidays or simply send cards?

The Devil Is in the Details

An easy way to get a handle on your expenses is to go through your checkbook and credit card receipts and determine how much you currently spend in each category: housing, medical, utilities, transportation, food, clothing, vacation, children, savings and so on. If your records are poor, keep close track of every expense for two months (and don't forget to account for expenses that fall outside that two-month period, such as insurance premiums). Then you can decide how much of each of these amounts is relevant in retirement.

Consider Tracy and George, our sample soon-to-be retirees. They live in a three-bedroom home with a large yard and $100,000 of equity. Their direct housing expenses are $2,500 a month including mortgage, taxes, insurance and repairs. In retirement, however, they do not see themselves staying in this large house with a yard. They estimate they would be comfortable in a $1,000-a-month apartment or condo, leaving them free to invest the proceeds from the sale of their home. They both love to travel and anticipate $1,500 a month in travel expenses.

Additionally, for most retirees, Medicare covers 80 percent of medical expenses. To be on the safe side, Tracy and George assume they will need an extra $500 a month for medical expenses. For this anticipated excess, they will either need a Medigap policy or have to pay out of pocket.