Forbes - February 21, 2020
Given a choice, would you spend more or less money during your retirement? There is a persistent myth that people will comfortably live on less income once they retire. Certain expenses may indeed reduce or completely go away while other expenses may creep into your budget.I may be stating the obvious, but people generally only spend less money in retirement if they are forced. Surveys have revealed that some retirees reported spending less money in retirement. I would be willing to go out on a limb and assume that much of that reduced spending was due to reduced income in retirement. That’s pretty straightforward. The less money you have coming in, the less money you can spend.
For those looking to maintain or even expand their standard of living in retirement, you will likely spend MORE money after leaving the workforce. Not working 40 (plus) hours will give you more time to spend spend spend. Do you dream of sitting on your porch drinking tap water? I didn’t think so. That dream vacation you have been talking about for years, well, retirement is the time to go. Many retirees are tempted to enhance their standard of living by putting purchases on credit cards. According to the Federal Reserve, credit card debt has skyrocketed 83% since 2001.
Some of the happiest retirees I know have active social lives. They keep a schedule that makes my head spin. Many of their social activities are not particularly expensive, but when you add up 10-15 of them, per week, it can turn into quite a bit of money. That is in addition to the increases, over time, in the cost of basic goods you buy every day. It is fair to assume that toilet paper and bread will cost more in 10 years. They will cost even more in 20 years.
Healthcare is another area people often underestimate when planning for retirement. Even with Medicare, you will be responsible for additional premium coverage that is necessary for most retirees. Fidelity recently estimated the cost of healthcare over a 20-year span for a 65-year-old couple who is retiring NOW to be about $280,000. That is just an average. A chronic illness could drive that figure much higher. Don’t even get me started on the cost of fighting something like cancer.
Another thing to consider is that $280,000 figure does not include things like long-term care coverage. You may be thinking, “I’m in amazing shape; there is no way I’d ever spend that much on healthcare.” The most annoying conclusion I saw in the Fidelity study is that healthy people often spend more money in retirement, partly because they live longer. Even for those with the best insurance, even basic health screenings can turn into budget busters.
Furthermore, the cost of health care in America has been increasing quite a bit faster than the rate of inflation and daily expenses. The $280,000 figure is for a couple retiring today. If you will be retiring 5, 10 or 15 years down the road, you can expect to spend a substantially larger amount of money in retirement. For those approaching full retirement age and eager to sign up for Medicare, don’t expect your spending to drop in retirement even if you are the epitome of perfect health.
During the last 17 years, I’ve seen it all as I’ve worked to help people plan and transition to a secure and happy retirement. Some people are happy with less money; others are living their best lives and enjoying every cent of their retirement incomes. Most people seem to shift spending once they leave the workforce. You may spend less commuting, but you may book a few more vacations and travel.
If you have the chance, develop a retirement plan that includes an income stream you cannot outlive. Look to replace 100% of your pre-retirement spending. For example, if your household makes $250,000, per year, and saves $50,000, per year, look to have around $200,000 of income in retirement. As you may understand by now, it’s better to plan for your dream retirement than settle for just scraping by.
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