What Is Cost of Living?
Your annual cost of living refers to the amount of money – the sum total of all your yearly expenses – required to sustain a certain standard of living, which varies from person to person. Some people enjoy a higher standard of living than others, who may by choice or necessity live more simply and inexpensively.
So what all is included in your cost of living? Anything that you spend money on to sustain your daily life should be included in your inventory of expenses to determine your cost of living. These cost of living expenses include:
- Mortgage/rent payments
- Major home improvements and furnishings
- Loans (e.g., automobile, home equity, debt consolidation, etc.)
- Federal, state and city income taxes
- Real estate and other taxes (e.g., sales, capital gains, etc.)
- Utilities
- Food
- Clothing, laundry and dry cleaning
- Educational expenses
- Child care
- Automobile expenses (e.g., gas, repairs, etc.)
- Other travel/transportation expenses (e.g., bus fare, subway fees, parking, tolls, etc.)
- Insurance (e.g., life, homeowners/renters, automobile, medical/dental/disability, etc.)
- Entertainment and dining
- Recreation and vacation travel
- Club dues/membership fees
- Sports and hobbies
- Gifts
- Professional services (e.g., tax, legal, financial, etc.)
- Charitable contributions
- Additional/miscellaneous expenses
Once you compile your current list of expenses, you can begin to estimate what your cost of living will be in retirement.
How Does Cost of Living Change When You Retire?
Once you reach retirement, your cost of living may be more or less than it is now, depending on a number of different factors. You may decide to downsize and simplify your life in retirement or move somewhere where the cost of living is more expensive. Your retirement dreams will shape your future cost of living, which will influence how much you should be saving now to reach your financial goals in retirement. Let’s consider how your living expenses may increase or decrease when you retire.
What Lifestyle Factors Can Increase Your Cost of Living?
Here are some examples of lifestyle decisions that can raise your cost of living:
- Moving to a different city with a higher standard of living will require more financial resources.
- Traveling more will most likely increase your cost of living with the purchase of additional airfare and transportation, lodging, sightseeing activities, rental cars, gas and vehicle repairs and maintenance, if you are putting more wear and tear on your own car or recreational vehicle. Assessing your desired destinations – whether domestic or international – will help you estimate how much more you may be spending on travel adventures in retirement.
- If you have adult children and/or grandchildren who require financial support during your retirement years, this family situation can dramatically affect your cash flow. Having relatives move in with you can increase your monthly expenses, including utilities and groceries.
- Deciding to pay for your children’s or grandchildren’s college education can have another significant impact on your cost of living in retirement. Considering your retirement needs before those of your children or grandchildren might make better financial sense in the long run, for both you and them.
- Another larger expense in retirement that might catch you by surprise is your cost of health care. Medicare may help pay for most of your health care expenses, but you will probably need to budget for Medicare supplement insurance as well to help pay for copayments, coinsurance and deductibles. This additional insurance may end up increasing your cost of living expenses.
- One of your retirement dreams may be starting a small business, like a bakery, flower shop or art gallery. Building a new business venture can be personally fulfilling, but it may require start-up costs that increase your cost of living.
What Lifestyle Factors Can Decrease Your Cost of Living?
On the other hand, different lifestyle decisions can end up lowering your cost of living:
- Instead of moving to a city with a higher standard of living, choose a destination with a lower standard of living to reduce your overall expenses.
- If you plan on staying in your current home after you retire, paying off your mortgage before you retire will eliminate a major monthly expense.
- Downsizing to a more modest house or condo also can be a significant money-saving decision. Selling your current home and living in a smaller place may give you a needed influx of cash to boost your overall retirement income.
- Do you and your spouse or partner need two cars when you retire? Selling an automobile can eliminate car payments, decrease your automobile insurance and save you money on gas, repairs and maintenance costs in retirement.
- Retirement is a good time to reassess your life insurance needs. At this point in your life, you may not need as much coverage, especially if your children are grown and have graduated from college. Your debt load is hopefully less during retirement, and you may not have a mortgage to worry about, so decreasing your life insurance coverage may be advantageous for you. Remember to consult with your financial professional to help make the best decision for your specific life situation.
As you estimate your post-retirement income and expenses, think about your essential needs and your future lifestyle to create a realistic financial picture of your future to calculate your anticipated retirement cash flow.
Cost of Living & Social Security
Once you retire and start receiving benefits, the Social Security Administration will make cost-of-living adjustments (COLA) to your monthly payment. The most recent COLA was 1.6%, effective in January 2020. The Social Security Act ties the annual COLA to the increase in the Consumer Price Index (CPI), which is determined by the Department of Labor’s Bureau of Labor Statistics.
Using This Retirement Cost of Living Calculator
Our Retirement Cost of Living Calculator allows you to itemize your pre-retirement and post-retirement income and expenses so you can assess how your current cash flow compares to what you project during your retirement. After completing your inventory of income and expenses, your results will indicate an increase or decrease in your retirement income, expenses and net cash flow, including a bar graph that summarizes your changes in cash flow at retirement. In addition, you can view a detailed data table showing the differences between all your current sources of income and those at retirement, along with the differences between all your current living expenses and projected expenses at retirement.
About Your Inputs
Our Retirement Cost of Living Calculator asks you to select a frequency period for your calculations and presents you with various data fields to itemize your pre-retirement and post-retirement income and expenses.
Assumptions
This section asks you about the frequency period for your information:
- Monthly or annual figures – You can decide to provide either monthly or yearly figures for your income and expenses for these calculations.
Itemized Income
This section asks you to itemize all of your sources of income and provide total dollar amounts for each of the following categories for pre-retirement and post-retirement:
- Wages, salary and tips – Include all sources of income from your full-time or part-time job(s).
- Received alimony and child support – If you are divorced and receive money from your spouse, include any payments for spousal and child support.
- Dividends from stocks, etc. – Include any income you receive from your investments like dividends from stocks, bonds, mutual funds, etc.
- Interest on savings accounts, CDs, etc. – Do you earn interest on any savings vehicles like Certificates of Deposit (CDs) or bank savings accounts?
- Social Security benefits – If you are receiving a monthly payment from Social Security for your retirement, include it here.
- Pensions – If your employer pays you a monthly or annual retirement benefit, include that amount as a source of income.
- Other income – List any additional sources of income that you receive, such as rental property income, payments received from a trust, etc. For your post-retirement amount, be sure to include regular distributions from your 401(k)/403(b)/457 plan(s) and/or IRA(s).
Itemized Expenses
This section asks you to itemize all your expenses and provide total dollar amounts for each of the following categories for pre-retirement and post-retirement:
- Mortgage payment or rent – Do you own a house or condo or rent an apartment? Include the total amount of your mortgage or rent payment.
- Vacation home mortgage – If you own a second home, include this mortgage payment as well.
- Automobile loan(s) – If you currently have a car loan, include your loan payment amount.
- Personal loan(s) – If you have taken out a personal loan to consolidate your debt, pay for a home improvement project or cover a large purchase, include your payment here.
- Charge accounts – What total amount do you pay on your credit card or charge accounts?
- Federal income taxes – This is the total amount of federal tax money you pay the U.S. Treasury each year based on your annual income. If you work for an employer, federal income taxes are usually withheld from your paycheck. If you are self-employed, you typically make quarterly income tax payments to the federal government.
- State income taxes – This is the total amount of tax money that you pay to the Treasury of your state of residence based on your annual income.
- FICA (Social Security taxes) – FICA, which stands for Federal Insurance Contributions Act, is the total amount of money you contribute to the federal government to pay for Social Security retirement and Medicare health insurance benefits for older Americans who are already retired. If you work for an employer, FICA is a mandatory payroll deduction. If you are self-employed, you pay self-employment tax, which is a Social Security/Medicare tax on self-employment. An employer pays half of the FICA, whereas a self-employed person must pay the entire Social Security/Medicare tax.
- Real estate taxes – If you own property (and do not live in a tax-abated residence), you pay annual real estate taxes based on the assessed value of your property (land and home or dwelling). Real estate taxes pay for a variety of municipal services and levies, such as schools, libraries, parks, mental health care, senior services, etc.
- Other taxes – Include here any additional taxes that you pay, including estate taxes, inheritance taxes, capital gains taxes, sales taxes, etc.
- Utilities – Expenses for various utilities include water, gas and electric, Internet access and cable television.
- Household repairs and maintenance – Owning a home can be expensive. How much money do you spend making household repairs (e.g., fixing leaking pipes, patching concrete steps, etc.) and regular maintenance (e.g., sealing the driveway, painting the exterior, replacing the roof, etc.)
- Food – How much do you spend on groceries for you and your family?
- Clothing and laundry – Include here how much money you spend on buying new clothes and cleaning them. Don’t forget about your dry cleaning charges.
- Educational expenses – Are you or your children currently enrolled in school? Total up your fees for tuition and room and board.
- Child care – How much are you spending on daycare and babysitting for your kids? Perhaps you employ a nanny inside your home to care for your children. Include all of these various child care expense.
- Automobile expenses (gas, repairs, etc.) – The newer your car, the less expensive it may be to maintain. Tally up all the expenses needed to keep your automobile roadworthy.
- Other transportation expenses – Do you spend money on public transportation like the bus, subway or train? What about those Lyft and Uber rides you take? Add up all your other transportation expenses, including public parking fees and highway tolls.
- Life insurance premiums – If you currently own any whole, term or universal life insurance policies, include the total amount of your premiums (money you pay to maintain coverage and keep your policy in force).
- Homeowners (renters) insurance – Whether you own your own home or rent a house, condo or apartment, you either pay homeowners insurance or renters insurance to cover the replacement costs of your house and belongings. How much does this cost you?
- Automobile insurance – Car insurance is mandatory for all drivers in case you are involved in an accident and need to pay for medical care for anyone who is injured and any repair costs to cover damages to the vehicles. As long as you own a car, you will be paying for automobile insurance.
- Medical, dental and disability insurance – Nothing is more important than your health, but insurance isn’t cheap. To maintain your health and to cover medical emergencies, including your teeth and the possibility of becoming disabled in an accident, you may be paying medical, dental and disability insurance premiums.
- Entertainment and dining – Include the total for your entertainment and dining budget. How much money do you spend eating out at restaurants and attending entertainment events like movies, concerts, plays, etc.?
- Recreation and travel – Recreation can include a variety of activities such as golf, skiing, playing video games, cooking, gardening, camping, hiking and bird watching – it all depends on what you like to do. Travel runs the gamut as well. Some people like to stay close to home while others are globetrotters. How much do you spend on these activities?
- Club dues – What clubs do you belong to? Include your membership dues for exercise facilities, sports clubs, political organizations, religious and spiritual groups, professional clubs, etc.
- Hobbies – What are your favorite hobbies and how much money do you spend on them? Hobbies can range from woodworking, stamp collecting and jigsaw puzzles to playing the guitar, fishing and photography.
- Gifts – Birthdays, weddings and holidays are just a few of the many occasions when we go shopping to buy gifts for our friends and relatives. What’s your total budget for gifts?
- Major home improvements and furnishings – When you own a house, you have to keep it up and fill it up. That means making major home improvements, like remodeling the kitchen, and buying various home furnishings, like a new sectional for the family room. All of these are expenses to estimate and include in your budget.
- Professional services – Do you pay for any professional services – like an attorney, tax accountant, financial professional or house cleaner? Include these fees in your breakdown of expenses.
- Charitable contributions – Like tracking your budget for gifts, it’s important to know how much money you freely donate to your favorite charities, religious institutions and/or non-profit organizations.
- Other and miscellaneous expenses – This last category is a catch-all field to account for any other miscellaneous expenses you may have – for example, diapers or baby supplies, bank service charges, magazine subscriptions or online streaming services.
About Your Results
Based on your inputs, this Retirement Cost of Living Comparison Calculator tabulates the increase or decrease and range of your income, expenses and net cash flow between now and retirement. A bar graph summarizes your changes in cash flow at retirement, showing your current and anticipated amounts at retirement (income, expenses and annual cash flow) in different colors.
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