3 Key Ways You’re Underestimating Your Retirement Costs

Take a moment and think about how much savings you’ll need in retirement.

Write that number down.

Now here’s a reality check: That number is probably low.

Not because of your math skills, but because most people underestimate what their costs will be in three critical ways.

A new study found that 37% of retirees say their overall retirement cost estimates turned out to be low.

And when it comes to healthcare, 44% of retirees said they’re facing higherx costs than they expected. (Source: 2018 Retirement Confidence Survey by Employee Benefit Research Institute)

Three Ways You’re Probably Underestimating Your Retirement Expenses…

#1. Assuming you’ll spend less in retirement than when working

The majority of people have never really sat down and calculated what they’ll need every month. You need to be comprehensive in listing out all expenses. And keep in mind you’ll typically spend more in the early years of retirement when you’re likely to be more active.

Would you like to travel? Enjoy hobbies? Visit grandkids? Add those costs in, too, because you aren’t working hard all your life to have to scrimp and sacrifice in retirement, are you?

Then throw in those major and often unexpected expenses that most people forget to account for, like a car repair, major dental work, a home remodel, needing to help out a child, a roof or major appliance that needs to be replaced… the list goes on and on, doesn’t it?

#2. Underestimating the impact of inflation

We’ve been the beneficiaries of historically low inflation rates in recent years. It’s easy to forget that inflation has been a lot higher over the years – in some years it’s been 10% a year and even higher.

But even low rates of inflation eat away at the value of your savings.

From 1913 to 2013, inflation averaged 3.22% a year, so factor in at least 3% inflation per year – 4% if you want to be on the safe side. (And that’s the government’s “official” calculation, which many believe to be low.)

Scary fact: If inflation averages just 3% per year, it will swallow more than $117,000 of the average Social Security benefit over 20 years, according to the LIMRA Secure Retirement Institute!

#3: Underestimating health care expenses in retirement

Out-of-pocket medical expenses in retirement is an area where many people are significantly underestimating their costs. And many assume most costs will be covered by Medicare, which is not true.

A 65-year-old couple retiring now will need $275,000 to cover out-of-pocket health care costs during retirement, according to a study by Fidelity.

And that number does not include the cost of nursing home or home health care.

At least 70% of people over age 65 will require long-term care services, and more than 40% will need nursing home care, according to the U.S. Department of Health and Human Services.

If you or your spouse require a stay in a nursing home, you would need over $250,000 to cover the typical average stay. And Medicare does not cover these expenses.

What Steps Should You Take if You’ve Underestimated Your Costs in Retirement?

There are several steps you can take to make up a retirement savings shortfall…

Is There a Way to Have True Lifetime Financial Security?

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