As people approach retirement, they often take a look at their projected retirement income and the expenses, scrutinize their findings, and then heave a sigh of relief. Unfortunately, all they have really gotten from that exercise is a false sense of security. While at first blush, it looks like they will have enough income to enjoy a comfortable retirement, in reality they may not, because most folks greatly underestimate two important factors!
Overall inflation usually runs at about 3.5% over long periods of time. Yes, we are in a low inflation period now but that can and probably will change. Let’s say that a decade ago you went to the store and spent $100 on basic groceries. Now those same groceries would cost you $141 and in 20 years they’d cost you $280.
Groceries are one thing but in retirement, health care costs are a more major concern since we need more care for several reasons. The first is that medical care inflation often is more like 6% – noticeably higher than general inflation. More procedures may be needed and new medications may be prescribed to control more health issues, etc. Let’s say that a doctor was $100 ten years ago. That same procedure would be $171 today and in ten years would be $574.
Inflation of retirement income is often much less then the inflation of expenses. Even if a person is fortunate enough to have a pension, many pension plans do not have a Cost of Living Adjustment (COLA) provision, so purchasing power goes down each year. That would mean if you spend $100 for groceries out of your pension today and you have no COLA for your retirement income, in 10 years you will only be able to buy $70 worth of food and in 20 years it would be only $49.
For many Americans, Social Security (SS) is a major source of retirement income. SS does have a COLA provision most years, but it is often reduced due to increases in Medicare premiums. The result is shrinking purchase power of SS dollars over time.
In the early 1900’s most people would not live to see age 70. Today, financial planners project people living well into their 90s.
As people age, they cannot do as much for themselves as when they were younger. Older folks need to hire people to do the yard work, clean the gutters on the house, and maybe even drive them around. These extra but often necessary services will be an additional cost in the retirement budget.
Also as we age, there is an increased probability of needing personal care for the activities of daily living. I did not say Long Term Care (LTC) since few ever think they will need that type of care but in reality many eventually will and it is very very costly.
Let’s say you are age 65 and about to retire. The current cost of 2.5 years of LTC is about $220,000. But most peoples do not need LTC at 65. More often, that need comes at an older age, let’s say age 85. If the person that retired today needed LTC at age 85, the inflated cost would be closer to $586,000.
What am I suggesting as a solution? Since projecting retirement income and expenses is not as easy as it may appear, consider sitting down with a financial planner and going over your retirement plan.
It may turn out that you do have adequate resources saved to supplement other retirement income, but it also may be that you do not. Perhaps you’ll need to change the investment allocation of your portfolio to increase or decrease risk and return. In any case, the sooner you have a clear picture of your retirement future, the better.
To find a financial planner now you can go to the website for the National Association of Personal Financial Advisors (NAPFA) on the web at http://findanadvisor.napfa.org/Home.aspx or to The Garrett Planning Network on the web at http://www.garrettplanningnetwork.com/map.html.