Planning For Retirement

People have many different financial goals, but one they share in common is to be financially independent. I define that as the time when we conclude that our annual expenses can be covered for the rest of our lives without working any longer. Calculating your expenses over the next 25-40 years with any degree of accuracy is a very difficult task. The second daunting task is determining your sources of retirement income.

To determine future expenses, we need to answer the following questions:
¨ How much will it cost my spouse and I to live?
¨ How long will my spouse and I live?
¨ Will I need to support anyone else like parents, children, and grandchildren?

There are some reasonable assumptions that some financial planners can make, however, as you can see it is very difficult to predict the course of time.

How Much Will It Cost To Live?
The best way to design a retirement budget is to have two types of budgets in retirement. The first budget is an actual expense budget with all needed expenses. And the second budget is a dream list of items that if the money were available they would buy.

Retirement expenses are around 75% of the normal non-retired living expenses. Usually there is no mortgage on your home and there are several senior discounts that are available. However, most financial advisors know that this is not always a realistic approach.

There are three basic stages of retirement. The first phase is the active phase when most people travel and do all the “things” they waited all their lives to do. This phase is the most expensive phase and often the retirees enjoy the good things of life. Once these wants are met the second phase of retirement is often active but a less expensive stage. The third phase is also an expensive phase when health care needs become more expensive.

How Long Will We Live?
Longevity can be predicted to some degree of accuracy by looking at your family’s health history then you can compare your lifestyle with that of other family members and determine if you are in better or worse shape than them. Of course the question is whether we do anything about what we know. If we have a quick and pain free death or a long and lingering death will also determine if we have enough funds to live on.

Currently the age assumption is to 100, with some feeling that it is a conservative estimate. To address the possibility of excessive medical needs in the future we strongly recommend that people buy long-term care insurance to protect against medical expenses. This will help to act as a cushion for a retiree.

Let’s not forget about inflation, no one can afford to ignore the effects of inflation. No matter what your monthly budget may be when you begin your retirement, the current inflationary rate of 4-5 % needs to be factored into the equation.

Supporting Others, After You Retire.
Most retirees can cover their own expenses fairly easily with careful planning. However, one expense that most people do not anticipate is caring for others. This could be parents, children and/or grandchildren.

In the case of children, it is my experience that these expenses can be unlimited. First there is college, then graduate school, then marriage, their first home and grandchildren. One of the most difficult tasks that financial planners have is telling my clients that they must tell their children that they cannot afford to support them indefinitely.

In summary, retirement expenses are difficult, but not impossible, to predict. Using current costs, a historic rate of inflation and a life expectancy of 100 years, we can come up with a reasonably accurate estimate of living expenses.