So you thought buying a house was expensive? Think about this: It’s going to cost you four to 10 times as much as what you paid for your home to ensure yourself of a comfortable retirement. The amount is so staggering that few of us bother to wonder if our nest egg is really big enough.
It’s time to wonder. Traditional “retirement needs analysis” calculates your current expenses and then assumes you’ll need somewhere between 70% and 100% at retirement.
What type of retirement do you want?
Such calculations are great as a wake-up call, but they ignore the most important step of all in retirement planning — imagining what you want retirement to be like. Plainly put, the amount of money you’ll need in future years depends on the lifestyle you plan to lead. Will you travel around the world? Is there a hobby that you’ve never had enough time to develop? Will you continue working part-time?
The reality is that pre-retirement expenses often have little or nothing to do with a post-retirement budget because we tend to think of retirement as a “new start” in life, not “winding down.” Going back to school, traveling and other new expenses may be in your retirement agenda. One obvious example is staring you in the face at this very moment. People planning for retirement in their golden years 20 years ago would never have thought to budget for a new computer every few years. Even seemingly small lifestyle decisions, such as paying $1,000 a year in tennis club fees, can make or break your retirement piggy bank.
The way to make planning for retirement realistic is to forget the numbers at first and use your imagination to construct a detailed picture of the way you want to live.
We tend to think of retirement as one never-ending sunset, stretching from age 65 or so out to the horizon. In reality, retirement has two distinct phases. The first phase consists of the years during which you and your spouse are healthy and living an independent life. You may even start a business or be working part-time to bring in some extra income. The second phase consists of the less active years, when your health is not as good and you need assistance in your daily life. Stage two can be much more expensive than stage one because of the cost of health care and increasing longevity. Instead of earning some extra income, you’re paying someone else.
There are a variety of questions to consider as you try to imagine each phase. If you’re married, you and your spouse should answer these questions together. You should figure out what your social security retirement benefits will be. The best way to gauge the financial impact of each stage is to complete the retirement expenses calculator twice — one time for each phase.
Phase One: Red Sails in the Sunset
To help you envision your life in retirement, consider the following questions and the financial impact of each:
- At what age do you want to retire? Will you have to defer retirement for financial reasons?
- Will you stay in your current home, purchase a smaller one, move to a different locale or purchase a vacation home?
- Do you want to pay off your mortgage at retirement? This will limit the amount of money you’ll have to use in retirement.
- Will you need to work for additional income? What would you do? Will you want to start a brand-new career? Will you need additional training to do so?
- What other jobs are you now qualified to do (even if you don’t want to do them)?
- What do you want to do with your free time, and which of these activities will cost the most money?
- Will you be willing to give up a particular pursuit (traveling, for example) if it is too expensive?
- What medical risks are you likely to face (chronic illness, heart surgery, progressive arthritis)?
- How much investment loss would you be able to tolerate?
- Can you support yourself financially if you get divorced or your spouse dies?
Phase Two: Slowing Down
In phase two, your health may decline or you may just slow down, but the result is that you need help in daily living. When you consider this phase, it’s a lot harder to think about your life and lifestyle. But it’s critical that you do so now, when you can plan for it. Use a retirement expenses calculator to estimate how much this phase will cost.
With some assisted care facilities and nursing homes currently costing $2,000 a month or more, it’s clear that for many of us, 80% of pre-retirement expenses just won’t be enough in the later retirement years. Here are the questions to ask yourself:
- Do you want to stay in your home? Can you afford home health care? Are you planning to move in with your children? Do they know this?
- Do you want to sell your home and use the proceeds to supplement your retirement income, or use part of the money to buy a condominium or apartment?
- Do you currently have an expensive hobby, like sailing, that you may not be able to continue, thereby freeing up funds for other things?
- Can you afford a lengthy hospital stay? What about around-the-clock nurses at home?
- Do you have a will, living will, health-care proxy, durable power of attorney? Inadequate retirement planning could mean that you’re kept alive against your wishes.
- Do you want an elaborate funeral or a simple service, cremation or a burial plot? Does your family know what you’d like?
Answering the questions above, difficult as they may be, serves two critical purposes in retirement planning. First, it helps you put realistic numbers together to help you figure out how much in retirement assets you’ll need. Second and even more importantly, you’ve visualized your retirement, possibly for the first time.
This brings retirement from the murky future into the clear present, so that you’re more motivated to make changes necessary today in order to live the way you want when the time comes.