Will tomorrow’s dollar buy as much as it does today? What does that mean to me as a retiree? Most retirees live on a fixed income comprised of their Social Security benefits, earnings, investment income, and pensions – if you’re one of the few who still has one. Most retirement planning generally involves saving a target sum or planning for a certain level of monthly income. Does your retirement plan include adjustments for inflation and cost of living increases? Given that the average American will spend over two decades in retirement, that question is more important than you may think. Those who retired twenty years ago on a monthly income of $4,000 would need over $6,400 per month today. An average annual inflation rate of around 3% means that your cost of living could nearly double throughout your retirement years.
Your financial advisor will make calculations that account for inflation and increases in the cost of living; your entitlement programs will adjust slightly too. Here are three other areas that make retirement more expensive than you may think.
Health Care Expenses
Medical expenses will likely become the largest expense in your budget, and they increase disproportionately as you age throughout retirement. A National Health Expenditure Survey reported that adults aged 85+ spent well over $8,000 per capita annually out of pocket for deductibles, co-payments, premiums and other health care expenses not covered by insurance. Those aged 75-84 spent over $5,000, and retirees aged 65-74 spent nearly $4,000. The rate of healthcare spending for retirees is more than twice as high as the average nonelderly adult, and the trend is increasing. Private spending on health care is projected to grow 5.3% per year through 2021. Spending on hospital services and physician and clinical services is projected to grow 5.7% and 5.4% per year, respectively. Your retirement plan must include savings for routine medical care as well as emergencies or unexpected long-term care.
Housing and Relocation Expenses
Will retirement include relocation to another city or will you stay put? If you own your home, it’s critical to budget for the long-term maintenance and upkeep of your property. As you age throughout retirement, there may be less home maintenance that you’re willing, or able, to complete yourself. On the other hand, millions of adults retire in a different state than where they lived throughout their working years. If you’re considering relocation, remember that warmer weather isn’t the only factor you’ll need to consider. As you research potential retirement communities, be sure to compare housing costs, access to healthcare, travel and accessibility and tax structures (income tax, sales tax, property taxes, etc.). Aside from initial relocation expenses, each one of these factors will impact how expensive or how affordable your choice will be.
The Cost of Using Your Own Money
After spending decades watching your retirement account grow, it can be somewhat of a shock when your disbursements are less than what you thought they would be. As you withdraw funds from your 401(k) plan (a tax-deferred account), an income tax will be applied at the current rate. There’s no way to predict exactly what that tax will be, and it will depend on the state in which you’re living. You can balance this implicit expense by including a combination of tax-free and tax-advantaged in your retirement portfolio. Your financial advisor can help select the savings vehicles that are the best for your individual situation.
Retirement is expensive, but financial education and preparation can keep these moving targets in their place.
