8 Reasons Retirement Will Be More Expensive Than You Think

Failing to look ahead, or not planning, are two common mistakes.

Cedric Holloman, Future Financial Concepts

Retirement. It seems so far away. Something to worry about later. Many employees and self-employed individuals feel saving for retirement is a discretionary expense that can be pushed into the future. In politics, they have an expression: “Kicking the can down the road.” Here are eight reasons you might need far more money in retirement than you think:

1. Social Security is a component, not income replacement

Some people still assume this government benefit they’ve contributed to during their lifetime is meant to support them in retirement. It is only one component of retirement income. Reminder: It is only one leg of a three-legged stool. Social Security is one leg, income from annuities or defined benefit pension plans is the second leg, and income generated by savings and investment is the third leg. And fewer people have that second leg these days.

2. You will probably live longer than you think

The average life expectancy in the U.S. is about 76 years. But if plenty of your relatives are in their 80s and 90s, then you have a good shot at this too. If you live in a major metro area with excellent hospitals and your family doesn’t have a history of major disease, you might live a lot longer than average. If you exercise and don’t smoke or drink to excess, you might reach 100. Plan your income based on your life expectancy.

3. Your spending might increase in retirement

Some expenses will go down when you stop working. For example, you need fewer sets of business clothing, you eat lunch at home and you are no longer commuting. But with lots of time on your hands, you might take more vacations, play more golf and eat out more frequently. Fun comes at a cost — which can be hefty, depending your interests.

4. Expenses will increase. Fixed income will not

Many plans like annuities or pensions start paying a certain amount and stay at that level. And even if you receive cost-of-living adjustments on your pensions or other plans, inflation may drive up prices even more for the things you spend money on. You need investments that ideally grow faster than the inflation that is driving up your expenses.

5. Some expenses grow much faster than inflation

Healthcare is a good example. Since 2000, the price of medical care (including services provided, drugs, medical equipment and healthcare insurance) has risen by 115.1%. Over this same period, the prices for all consumer goods and services rose by 78.2%. Some expenses only go in one direction.

6. Medicare doesn’t cover everything

The previous point might not bother you because at age 65 they can be covered under Medicare. You will still need supplemental insurance. Even if you see plans on TV that might have little or no cost, you do not know what the future holds. In addition to supplemental premiums, policyholders often have out-of-pocket deductibles.

7. Long-term care is an issue

Many people fear that they might live a long life but their body won’t cooperate. They might have adequate income to support themselves in retirement in the early years, but will need additional care in their later years. Long-term care can cost a lot more than cruises. You may be unable to pay for long-term care expenses unless you plan ahead.

8. Taxes are an issue

Property taxes could become an issue. Income taxes could rise as well. This expense is beyond your control unless you downsize or move to a community with lower taxes. Try to plan for as much tax-free income as possible.