Recommended Category Percentage of Household Retirement Budget

When planning for retirement, it's essential to consider the various expenses that will arise during this phase of life. One key expense is medical care, which can be significant. According to Fidelity Investments, couples may need up to $315,000 after taxes to cover medical expenses over the course of their retirement, excluding long-term care.

In addition to medical expenses, retirees often want to travel and enjoy leisure activities. In fact, financial planner Mark Bass notes that the biggest expense in the first three years of retirement is often travel. This can include taking extended trips, staying in luxury accommodations, or paying for business class flights. For example, a four-week trip with luxurious amenities can cost upwards of $20,000.

Other expenses to consider when planning your retirement budget include income taxes and living expenses. Since withdrawals from tax-deferred savings accounts are subject to taxes, you'll need to factor this into your calculations. Additionally, you may have other sources of income, such as Social Security benefits or a pension, which will impact your overall budget.

The general rule of thumb is that retirees should aim to replace about 80 percent of their pre-retirement income in order to maintain their lifestyle. This means that if your annual pre-retirement income was $50,000, you'll want to target an income replacement rate of at least $40,000 per year. However, this percentage may vary depending on individual circumstances.

To determine how much you need to cover these expenses, consider the following steps:

1. Estimate your medical expenses: This includes out-of-pocket costs for doctor visits, prescriptions, and other healthcare services.

2. Plan for travel and leisure activities: Consider any trips or vacations you want to take, as well as hobbies or interests that will require funding.

3. Factor in income taxes: Since withdrawals from tax-deferred savings accounts are subject to taxes, you'll need to account for this when planning your budget.

4. Calculate other sources of income: This includes Social Security benefits, pensions, and any other regular income streams.

By following these steps and considering the various expenses that will arise in retirement, you can create a comprehensive budget that meets your needs and helps you maintain your desired lifestyle.

Recommended category percentage of household retirement budget