Column: How much will you really spend in retirement? Learn how to start saving now
Commentary by Joel Harris
One of the most frequent questions I get in my practice is, “how much of my pre-retirement spending should I plan on budgeting in retirement?” The answer will vary widely based on the countless articles available online and in financial magazines. In my experience as a Financial Advisor, 9 retirees out of 10 will spend 100% of what they were spending in retirement. I find this especially true in the first 7-10 years of retirement because most people pick up new hobbies, travel, eat out more often, and spend money on their grandchildren. Here are a few other reasons why most retirees will end up spending 100% of their pre-retirement expenses in retirement.
Inflation – Inflation is the silent killer of money. Most people start getting really serious about their retirement planning in their mid 50s. One of the most commonly misunderstood risks in retirement planning is inflation. Most Americans think in terms of the value of a dollar “today” versus the value of a dollar “tomorrow”. Take Jim and Jane for example. They’re annual expenses run around $90,000 per year, which includes mortgage payments of approximately $18,000 per year. Their goal is to pay off their home and retire in 10 years. When you subtract the mortgage out of their annual expenses, you get $72,000. Will their expenses be $72,000 when they retire in 10 years? More than likely not because those expenses will balloon to approximately $96,700 if inflation averages 3% per year.
Every Day is a Saturday – I heard this phrase from a very astute mentor during my early years in the business. I used to listen to him speak about estate and financial planning, and the most important question he asked the audience was, “what day of the week do you spend the most money?” After the audience got done laughing for a few seconds, it dawned on them that they spend the most money on Saturday. Well folks – every day in retirement is a Saturday. Most retirees will have a lot of free time on their hands. Guess what happens when you have more time on your hands? You tend to spend more money. I’ve seen it time and time again, so plan accordingly.
Underestimating Healthcare Expenses – In a 2014 study conducted by Fidelity, a 65 year old couple will spend an average of $220,000 to cover medical expenses during retirement. Healthcare costs is one of the most under estimated expenses retirees calculate in their retirement planning. What’s more alarming is healthcare and long term care costs continue to increase an average of 5-6% per year.
Obviously everyone’s situation is different. Some might downsize their home and use the proceeds to help fund retirement; while others might move to a more affordable part of the country to help minimize expenses. There is no “one size fits all” answer in retirement planning. This article is simply written to make you aware of the some of the spending pitfalls I’ve seen first hand when people transition to retirement. Most importantly, don’t underestimate the power of inflation when you plan for your golden years. Think in terms of “tomorrow’s dollars” vs. “today’s dollars”.