One of the biggest myths around is that you will be spending less money after you retire. Sure, it’s possible, but think about it. Your income will likely be lower and prices keep on rising. On everything.
This and other “rules of thumb” continue to live on, persisting even though they are being disproved time and time again.
Here’s a rule of thumb that is slowly dying: after you retire you’ll only need about 70% of your working-life budget.
Okay, so how did the wizards that run the Rule of Thumb Factory come up with that one? As lifetime advisors, we know that thumbs are far more useful than rules of thumb, which are sometimes true but are often nowhere close to reality. Many retirees are shocked to find that even though they are saving on things like commuting costs, daily lunch with the work buddies, laundered shirts and dry cleaned dresses, there are a number of costs that will replace them. And then some.
Sure, the big ones may be gone: the house is paid off (hopefully!), no more kids to raise (hopefully!), and college has been put to bed (hopefully!). But if you were a steady and diligent steward you had as much as a decade or more before retirement without those expenses while you still had a paycheck or two coming in. But what happens when the paychecks stop?
Retirement, the golden years, should be a reward for a lifetime of hard work, and bring you peace of mind, but there are areas of your life that will still have steadily rising price tags attached to them, especially the Big Four: Healthcare, Housing, Food and Transportation.
Healthcare is the killer, hopefully not literally. Your golden years will be punctuated with day-to-day illnesses and possibly longer term serious diseases. With them you will see a sharp spike in costs.
Medicare Part A (Hospital Insurance) has you covered, but not all the way. You will need a solid supplemental plan, as well, which will be a significant out of pocket expense. Three months before you turn 65, be sure to become literate in Medicare-speak and begin the application process, even if you’re not ready to retire. And sign up early for Part B (Health Insurance) as well to avoid premium increases, fully 10% for every 12-month period you were eligible but failed to enroll.
Housing is not a freebee. Even with your house paid off, property taxes and homeowners insurance premiums never stop. Houses are not self-repairing, so figure a roof, a furnace, water heater, air conditioning problems, paint, carpets, and so forth. If you stay put, you may have to buy any or all of these from your fixed income or out of assets.
If you still live in the large home where you raised a family, do you still need the space for only two? or one? Downsizing is always an option to contain costs, but then there are other costs to consider. Real estate commissions, closing costs, moving expenses, new house rehab, etc.
Home renovations may be a fun, satisfying hobby for do it yourselfers, but you can’t be climbing ladders at eighty, one rule of thumb we agree with. So, while upkeep is a necessity, with materials and labor cost always on the rise, home remodeling is now squarely in the luxury column. If the remodeling project must be done, and you can’t do it yourself, it is crucial to have referrals from a trusted source, like a family member or friend, or even Angie’s List.
Food prices never go down, but costs can be contained when most meals are prepared in the home. Eating out too often can break the bank. With exorbitant markups at restaurants, the timing and frequency of special meals out is a must.
Transportation and Travel The average retiree still spends thousands a year on getting from point A to point B. Sure, the commute is gone, but what replaced it?
AAA tells us that it costs close to $9000 to own and operate a car, between payments, maintenance and repairs, annual inspections, and, of course, auto insurance. Do you still lease or have a payment? Two? Selling off one off may pocket you that $9000, but, of course, that just a rule of thumb! A couple with only one car may be difficult, depending on the activities that you and your spouse are involved in, but creative ride sharing and public transportation (often free for seniors) can solve the problem. Hitchhiking is not recommended.
The need for clothing, entertainment, shopping, gifts and a host of other things obviously don’t stop when you retire. It’s a certainty that prices for all those things will rise as your income remains stagnant.
For a retiree it is absolutely crucial to get two things right: Income and Expenses. It starts with creating a Budget that you can stick to, and budgeting success will rely on both spouse’s spending habits, and the sources and timing of your income.
Most retirees take social security right away when they reach their social security retirement age, and for many this is a mistake. When they have other sources to draw from (ROTH, IRA, investments and savings) they can delay taking SSI, which will result in a larger SSI monthly payment. This can be delayed until age 70, and we strongly recommend making this decision with a qualified CFP, a certified financial planner professional.
Social Security is not enough. If you are still 30 years, or 20, 10 or even 5 years away, you still have time to plan ahead.
With a plan that revolves around Passive Make and Active Keep, your retirement dreams may become a reality, even if you’re all thumbs!