If you are about to retire you might be wondering what is the true cost of retirement? Most financial advisers use a couple of assumptions in assessing how much money you need to save for retirement. The first is that they assume the standard duration of retirement will be 30 years. This is regardless of your health and retirement date. The second assumption that many advisers will use is that you will need 70% to 80% of your income after retirement. This is supposed to cover your expenses and retirement plans.
As always, with many planning activities, the devil is in the details. Every person, and every couple have different requirements and needs. They have different situations that they are dealing with. A retirement plan should be customized for the couple or individual. It should ensure that they have sufficient money available for them in retirement to maintain their quality of life.
What is the true cost of retirement
These two assumptions are a good starting point only.
For example if you are 65 and just retiring, the 30 year life expectancy may be fine for one couple. Especially if their ancestors lived well into their 90s. On the other if hand your family history suggests living to 70 or 80 years of age, a 15 year plan might be more practical.
True Cost of Retirement
With regards to only requiring 70 to 80% of your pre retirement income. There are many variables that should be taken into account. We will cover a few.
For example consider if you’re still supporting children who are in college. They may have tuition payments and other related expenses. You may need more than your 80% for the first couple of years.
Are you retiring debt-free? Is your mortgage paid off? Are you still paying a car loan? These are major monthly expenses that have to be factored into your pre-retirement expense. As well as your post retirement expense. These factors will help decide if you will have sufficient money to cover all of your cash expenses during retirement.
Consumers also need to consider what retirement expenses will increase during the retirement years. For example inflation which has been pretty constant and in a range of 3% for the past 20 years. It will eat into your retirement income, particularly if you are on a fixed income. The longer you are retired the more inflation can be a factor. It is very important to factor in inflation.
Don’t forget Healthcare costs
Healthcare costs must also be considered based on your family’s history of healthcare needs and situation.
Your consumption will also change over the years. As you get older most people will spend less on clothing, food and other daily expenses.
All of this needs to be factored in to your retirement plan to ensure that consumers have sufficient money during retirement. Start with the 70 to 80% rule. Then adjust based on your own personal situation. You may also require the help of a financial advisor to create a retirement income model. It should be based on your savings and pensions as mentioned earlier