Updated: Nov 13, 2021
Things aren't quite what they used to be.
We can't underestimate the power of compounding and the need to forecast the money we will need annually in retirement “after inflation” has been applied (which can look far different from what we may have been thinking).
Just to make the point, I met with a 28 year old client )about 3 years ago) who was earning 100K at that time in today’s dollars and wanted to have the same 100K a year (gross) lifestyle at age 65. Crazy, but at the time we estimated that he would need an income stream of $208K a year to create that same income level 37 years in the future (assuming inflation was 2% annually).
I hear, "I'm a modest person.."
"..all I need is about 40K a year..”
Many times clients say things like, “I’m a modest person, all I need is about 40K a year” after taxes in retirement. In this recent article in Forbes, the author points out a million dollars today earning an 2% annual return after being adjusted for inflation will only provide $44K+ in annual income for 30 years (before taxes). That assumes all your expenses never increase (which is not realistic). I live in AZ, the water and electric bill go up every year (never mind food)! That number also assumes you never have any real emergency, never get divorced and never have a medical event.
A 2017 Retirement Health Care Costs Data Report from HealthView Services expects that retiree health care expenses will rise at an average annual rate of 5.47% for the foreseeable future. So medical expense will definitely increase and with divorce rates somewhere around 50% and rising among the over 50 population that may just not be a realistically possible. Facing a divorce or medical issue later in life will reduce our assets even further and can jeopardize any planning we have done. According to a 2017 survey by the personal finance site GoBankingRates, 1 in 3 Americans have nothing at all put away for retirement, so the financial picture may be even worse if we have not saved adequately to begin with.
"..all I need is about 40K a year..”
According to the HealthView report, the average healthy 65-year-old couple could pay almost $404,253 in today’s dollars ($607,662 in future dollars) in total health-related costs throughout retirement. That includes lifetime health care premiums (Medicare Parts B and D, supplemental insurance, and dental insurance) and deductibles, co-pays, hearing, vision, and dental cost sharing.
Taking it further, women will face higher lifetime health care costs because they will live longer - on average, two years longer than men. The same report found that the expected healthcare costs for a healthy 63-year-old woman retiring now and living until age 89 will spend approximately $362,607 (in future dollars) on health care in retirement. That's 29.9% percent more than a single 65-year-old man ($279,176) would pay.
Medicare simply doesn't cover dental services, prescription eye-wear, hearing aids and related exams, or LTC expenses for chronic conditions or disabilities, deductible for hospital stay, for stays > 60 days there’s a daily rate, and patients must pay 20% if the Part B doctor services after premium & deductible. Let’s be honest, the way Social Security is going, who know if a Medicare benefit will be there and resemble even today’s benefits.
So if a million dollars today is probably not enough to retire on, a million in the future will be even less. According to another article, “Even a $1 million retirement nest egg isn't enough anymore” that same $1MM for a 42 year old today will only be the equivalent of 19K a year at retirement. Worse yet, a 32 year old today retiring at age 67 will live below the poverty line.
Look, we never know what will happen. If I had not begun saving early and ensured my ex-spouse and I had no credit card debt or car loans, we never would have been able to survive what could have been a life devastating divorce that dissipated about 200K in family wealth.
If you haven’t begun thinking about saving for retirement, start now. Build healthcare costs and inflation into your plan, even if you “think” they may be covered. Start early. Every bit helps!
This information is not meant to be construed as financial, tax, or law advice. Always speak with a professional in the applicable area of expertise to address you specific situation and concerns