Myth: My expenses will go down when I retire so I don’t need to save as much for retirement.
Truth: With inflation, taxes and medical bills, your expenses will go up when you retire so you need to be prepared!
Quite a few financial planners out there recommend a future nest egg value that will produce 80% of your current income when you draw a percentage of the dividends and earnings out of the account each month. The assumption is that your expenses will decrease by 20% when you retire and you will need less income to continue with the same standard of living.
This means when you reach retirement age, you will have your debts paid off (including your house) and your dependents are gone, with your health remaining good and your taxes decreasing because you’re pulling the income out of a tax-deferred retirement account, pension, or social security. Now, if you follow the L.I.F.E. Ladder and start early enough, you indeed should be debt free by retirement age and have fewer expenses in terms of debt. But the sad fact is, not very many of us actually follow those steps and we end up facing retirement with a huge drop in income but no drop in expenses. Actually, 43% of Americans have less than $10,000 saved for retirement. 27% have less than $1,000 saved. This is a problem.
Even worse, for most of us our expenses will start growing exponentially as you get older. An increase in life expectancy comes with a cost: the cost of medical treatments, procedures and care facilities to help you live longer. The cost of medical care continues to rise in order to provide cutting edge technology to patients. Government attempts to control the costs may or may not be successful. I tend to think the cost will still rise but our taxes will go to subsidize that cost to make health care more affordable to those of us who are unprepared for increased costs in retirement. Even if that?s not the case, can you be certain that taxes won’t be raised by the time you hit retirement age?
Or let me ask you this: when you retire, do you want your standard of living to decline? I surely don’t want my lifestyle to slow down when I retire. I’d rather be prepared and err on the side of caution, meaning I have far too much saved up. That way I can have fun in retirement and live a little while still leaving something for my children and their children.
Matt Wegner is a personal finance, small business and leadership coach focused on teaching his clients the tools for L.I.F.E. (Living In Financial Excellence). Learn how to communicate with your spouse about money by requesting a free planning session today or visit financialexcellence.net.