Financial Retirement Planning

What is the true cost of retirement?

cost of retirementIf 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, 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 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 and different situations that they are dealing with. A retirement plan should be customized for the couple or individual to 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 whose immediate ancestors lived well into their 90s. On the other hand if you have a history within your family of only living to 70 or 80 years of age then a 15 year planning horizon might be much 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 if you’re still supporting children who are in college with 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 and your post retirement expense to help you 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, will eat into your retirement income, particularly if you are on a fixed income. The longer you are retired and relying on your income from savings, employee pensions, and government pensions the more expensive you retirement will be due to inflation.

Healthcare costs must also be factored in based on your family’s history of healthcare needs and situation.

Your consumption will also change over the years and 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 and then adjust based on your own personal situation. You may also require the help of a financial advisor to create a retirement income model based on your savings and pensions as mentioned earlier

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