Estimating Expenses

THINK ABOUT HOW much you spend during a one-week vacation. Now, imagine being on vacation 52 weeks a year. The implication: You’ll likely find ample opportunities to spend whatever retirement income you have.

Your ability to splurge on travel, entertainment and eating out will depend not only on your after-tax income, but also on how much of that income gets chewed up by fixed costs, so you might take a shot at estimating what those will be. We’re talking here about expenses such as utilities, groceries, car payments and insurance premiums. Potentially, your two biggest fixed costs will be housing and debt payments. You may want to spend your final years in the workforce getting those two under control.

To that end, consider whether you ought to trade down to a smaller home, which may cut your maintenance expenses, utility bills, homeowner’s insurance and property taxes. It may also allow you to pay off any remaining mortgage debt and perhaps free up home equity that can then be added to your retirement savings.

For many folks, eliminating their mortgage is the sign that retirement is finally affordable. What if there’s no way you can get your mortgage paid off by the time you quit the workforce—and you foresee carrying the loan for many years after that? You might refinance your existing loan balance with a new 30-year mortgage. That could slash your monthly payments, because you’re extending the loan’s repayment over a much longer period.

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